China Evergrande Fallout Hits Western Bond Funds

The potential default of real-estate developer China Evergrande Group is taking a toll on funds in Europe and the U.S. that chased high yields in the Chinese corporate bond market.

Concerns that Evergrande might not pay its bonds this month triggered selling of other companies in the country’s property sector, weighing down funds managed by Ashmore Group, BlackRock Inc. and Pacific Investment Management Co., among others.

While Evergrande bonds have been trading around 25 cents on the dollar for much of September, selling spread Monday to other large developers. Yuzhou Properties‘s 8.5% bond due in 2024 dropped about 10% to 75 cents on the dollar, according to Advantage Data Inc.

Fears of spreading fallout hit U.S. stocks and bond yields Monday, driving the yield on the benchmark 10-year Treasury note down to 1.308%, according to Tradeweb, from 1.369% Friday.

Western money managers increasingly purchased Chinese corporate bonds in recent years despite signs of a housing bubble. The buyers were looking for investments that paid more than the anemic yields in their domestic markets and could benefit from China’s high economic growth compared with developed markets. Many also believed that China’s government would bail Evergrande out if it foundered because of its size—the firm owed about $89 billion of debt as of June.

Some of the China bulls, like Ashmore, were emerging-markets specialists, but others were global-bond funds that traffic in developed and developing markets.

One of Ashmore’s larger funds lost about 1% last week and is underperforming comparable funds by 3.62 percentage points this year, according to data from Morningstar. The firm owned by U.K. financier Mark Coombs also performed poorly in 2020 after large bets in Argentina, Ecuador and Lebanon backfired in quick succession. Its stock has dropped about 20% this year, according to data from S&P Capital IQ. A spokesman for Ashmore declined to comment.

A global income fund managed by BlackRock lost about 0.31% last week and is lagging behind competitors by roughly one percentage point in 2021. The Ashmore fund was about 5% invested in Chinese corporates and the BlackRock fund had an approximately 7% exposure.

Worries may be overblown that default by Evergande could trigger a systemic crisis in China, much like Lehman Brothers Holdings Inc. did in the U.S., because other developers are functioning well, said Alan Siow, a portfolio manager at Ninety One.

“We don’t think Lehman is an apt analogy,” said Mr. Siow, who does not own any Evergande debt in his emerging-markets corporate bond fund and is focused on finding “companies that are best positioned to succeed in this environment.”

Distressed-debt hedge funds are also turning their sights on China’s corporate bonds, hoping to buy at bargain prices and to profit by restructuring the debt or by selling out when the broader market rebounds. “We’re doing a lot of heavy-duty work on [China],” said a portfolio manager at a New York-based fund.

A group of Evergrande bondholders formed a committee in recent weeks to create an organized negotiating block in restructuring talks with the company and the Chinese government, a person familiar with the matter said. Investment bank Moelis & Co. and law firm Kirkland & Ellis LLP are advising the group, the person said.

Superannuation is the first thought when it comes to self-funding retirement. Yet it is hardly the only option for doing so.

Just as we have a choice in how and where we work to earn a living, many people also have a choice in how to fund their retirement.

It is possible and sometimes preferable to leave your superannuation untouched, allowing it to continue growing. Some or all of your income can come from alternative sources instead.

Here are some alternatives you can consider.

1. Downsize your home

For many who own their own homes, the equity accrued over decades can eclipse the funds in superannuation. However, it’s theoretical money only until it is unlocked.

Selling up the family home and downsizing – or rightsizing – for retirement allows you to pocket those gains tax-free and simultaneously relocate to a more suitable home with lower upkeep costs.

Up to $300,000 from the proceeds can be contributed by a downsizer to boost your super, and the remainder can be used to fund living expenses or actively invested.

Remember that while the sale proceeds of your home are tax-free, any future profits or interest earned from that money will be taxable.

2. Part-time work

Semi-retirement allows you to gradually step into retirement. You continue earning income and super while working part-time, keeping a foot in the workforce while testing the waters of your new found free time.

Doing so also offers scope to move into different roles, such as passing on your skills to future generations by teaching/training others in your field of expertise, or taking employment in a new area that interests you and is closer to home.

3. Self-employment

Retirement from a full-time position presents a good opportunity to pursue self-employment. With more time and fewer commitments on your hands, you have greater scope to turn your hobby into a business or leverage your professional skills and reputation as an external consultant.

Also, for the self-employed and those with a family business, director’s loan repayments from the company are typically tax-free, offering a potentially lucrative source of

income and a means of extracting previous investments into the business without selling your ownership stake.

4. Investments

Rental property income (from residential or commercial properties) can supplement or even provide a generous source of income. The same applies to dividends from shares.

These are likely to be more profitable if you own them well before retirement.

Income that is surplus to your everyday needs can be reinvested using tax-effective strategies to grow your future returns.

5. Family trust

A family trust could be used to house investments for yourself and other relatives, building intergenerational wealth.

Trusts allow funds to be allocated to beneficiaries to manage marginal tax rates and stretch the money further, you have control over how income is split between different family members and have flexibility for changing circumstances.

6. Selling collectables

You may not realise the value of items you have collected over the years, such as wine, artwork, jewellery, vintage cars, and antiques.

Rather than have them collect dust or pay to store them, they could be sold to fund your living costs or new investments.

Where possible, avoid selling growth assets in a depressed market – wait until you can extract maximum value.

7. Obtaining a part-pension

Part-pensions are not only possible but valuable in making your superannuation stretch further. They still entitle you to a concession card with benefits in healthcare, transport, and more.

Take these savings even further by requesting pensioner discounts with other companies, on everything from utilities to travel and insurance to eating out.

Also, don’t overestimate the value of your assets as part of the means test. It’s a common mistake that can wrongly deny you a full or part-pension.

Plan ahead

However, you ultimately fund your retirement, planning is crucial. Advice would hopefully pay for itself.

Understand your spending and how those habits will change before and during retirement, then look to investments that offer the best fit.

Consider a mixture of strategies to diversify your risk, manage your tax liabilities and ensure ongoing income.

Above all, timing is key. The further ahead you plan, the more time you have to embrace additional opportunities and do things at the right time to maximise their value. You’ve worked hard and now is your chance to enjoy the fruits of your labour!

Helen Baker is a licensed Australian financial adviser and author of the new book, Money For Life: How to build financial security from firm foundations (Major Street Publishing $32.99). Find out more at www.onyourowntwofeet.com.au