“Usually the yield of stocks should be lower than that of the bonds. When the opposite happens in the US, the companies buy back the shares. But no one does that in China,” the Shanghai-based manager told FSA during a recent visit to Hong Kong.
Guo manages the Bosera Credit Market Bond Fund, which began selling in Hong Kong last month through the Mutual Recognition of Funds scheme. Like most onshore China bonds, the fund can invest up to 20% in equities.
Currently 18-19% is invested in equities, Guo said. “The stocks we invest in have higher dividend yield than the bonds, with a low price-to-earnings ratio. They offer stable returns like bonds.”
Mainland banks, for instance, have a dividend yield of 5-6%, while some companies, such as Shanghai-listed SAIC Motor have had a dividend yield as high as 10%, he added.
The higher stock dividend yield over bonds might also lead to a hostile takeover. The notable example is a case involving the founder and chairman of real estate company Vanke, Wang Shi, and private conglomerate Baoneng, Guo noted.
“But stocks are not my main battlefield. They are used merely to enhance the return of my portfolio.”
For the rest of the bond holdings, roughly 85% are in fixed rate bonds, mainly policy bank financial bonds. The other 15% is invested in credit bonds across industries such as utilities, auto and financials.
“I have sold out all the coal and steel sector related bonds since the first half of last year, as the industries are reaching a turning point with higher default risks.
“Even if the [sold off] bonds are not announced in defaults, any negative news will trigger an almost zero liquidity to the bonds,” he said.
China offshore bonds generally have a higher yield than onshore ones. But Guo said the onshore market has "more depth, with higher liquidity, and greater types of products, such as convertibles.
"For a company which issues bonds in both onshore and offshore markets, I believe if it really goes into default, the firm tends to protect the onshore one," he added.