What is an Asian Bond Fund (ABF)

An Asian bond fund is a fund that invests in government and corporate debt of Asian countries. These funds often exclude Japan, as it is not an emerging economy and therefore is a much different investing landscape than other Asian nations.

Bond funds invest principally in bonds and other debt instruments, and the Asian bond fund is no exception. There are two basic kinds of Asian bond funds. The first is a dollar-denominated, or hard-money, Asian bond fund, and the second is a local-currency denominated fund.

BREAKING DOWN Asian Bond Fund (ABF)

Asian bond funds have a benchmark of one of the many indexes of Asian debt securities. A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose. Asian bond funds indices include the JP Morgan Asia Credit Index and the the Markit iBoxx Asian USD Bond Index. The J.P. Morgan Emerging Markets Debt indices are the most loyally followed by asset managers in the industry.

Emerging Asian Debt

For investors worried about taking on the risk of investing directly in the domestic currencies of emerging Asian economies, a dollar-denominated fund may make sense. At the same time, investing in the local currency of a fast-growing, emerging economy can provide added gains. Several global investment management and holding companies offer Asian bond funds as part of their investment portfolios.

Not everyone agrees entirely on which countries are emerging markets. For example, the International Monetary Fund (IMF) classifies 23 countries as emerging markets, while Morgan Stanley Capital International (MSCI) also classifies 23 countries as emerging markets. Standard and Poor's (S&P) and Russell each classify 21 countries as emerging markets, while Dow Jones classifies 22 countries as emerging markets.

Risks of Asian Bond Funds

Asian bond funds, and emerging market debt, in general, grew in popularity during the 2000s. Corporate and government borrowers showed they had learned their lessons from the Asian financial crisis of the 1990s. Bond investors continued to search for higher yields. Except for during the immediate aftermath of the 2008 financial crisis, investors have stayed loyal to these types of investments, as low-interest rates in the developed world make their higher yields attractive.

Corporations and governments in Asia have also benefited from the popularity of Asian bond funds. Traditionally, it was challenging for governments and companies in emerging markets like Thailand or Indonesia to attract investor interest in debt that was denominated in local currencies. Bond buyers did not want to accept risks associated with unproven economies. It was this dynamic, in fact, that exacerbated the 1997 Asian financial crisis, as local businesses that borrowed in dollars could not pay back dollar loans with their collapsing local currencies.

Many emerging-market central banks responded by amassing considerable foreign-exchange reserves to prevent a currency crisis. The reserves also ensure that local businesses and financial institutions can buy dollars with local currency at a reasonable price. These resources helped ease investor concerns about investing in local-currency funds, and now each year there is a much greater issuance of domestic currency debt than hard currency debt.

Examples of Asian Bond Funds include the First State Asian Bond Fund, The Fidelity Funds Asia Bond Fund, and PIMCO Emerging Asia Bond Fund.