- While several banks in Singapore have raised their fixed deposit rates, there is still a selection of low-risk bond funds that can offer investors with relatively higher yields.
- Income has returned to fixed income. We believe it is time to pay more attention to bonds as the asset class is now providing much higher yields, and highlight three funds that investors can consider.
- First, the United SGD aims to achieve a yield enhancement over SGD deposits. Its portfolio yield has climbed to 5.3% against the backdrop of rising rates.
- Second, the Nikko AM Shenton Short Term Bond Fund invests in a diversified portfolio of good quality, short-term bonds and money market instruments. It has achieved a portfolio yield of 4.9%.
- Third, the LionGlobal Short Duration Bond targets investors who wish to earn a higher yield than fixed deposits and money market funds by taking on slightly higher credit risk. Its portfolio currently produces a yield of 5.0%.
In the environment of higher rates, several banks in Singapore have raised their fixed deposit rates. Nonetheless, there is still a selection of low-risk bond funds under our recommended funds list that can offer investors relatively higher yields.
The case for fixed income
Why bonds? We think that global bonds (as gauged by Bloomberg Global Aggregate Bond Index) have turned more attractive after tumbling by more than -20% from its peak. The widening credit spreads, combined with monetary tightening, have pushed today’s bond yields to levels not seen in a long time. For example, in the global investment grade (IG) basket, yields have climbed to a high since 2009 (Figure 1). Geographically, within IG, Asia offers the highest levels of yield.
Figure 1: Bonds are offering more attractive yields today
There is hardly any doubt that income has returned to fixed income. The asset class is now providing much higher yields, creating an opportunity for investors to receive higher total returns over time, even if near-term market volatility persists.
To be clear, short-term bond yields have moved significantly higher as compared to long-term yields, implying that investors can receive alluring yields without having to take on greater duration and credit risk (Figure 2). The inversion of the yield curve reflects a negative term premium, and we see long-term yields moving up further as investors demand a greater term premium. Hence, we believe that it is still too early to add significant duration risk, and we prefer short duration bonds.
Figure 2: Yields of shorter-dated bonds look more attractive
In light of this, we shine the spotlight on three of our low-risk, short duration recommended funds that we believe will appeal to conservative investors on the hunt for yields.
1. United SGD Fund
The United SGD Fund aims to achieve a yield enhancement over SGD deposits, with a long-term view to preserve capital by mainly buying into investment grade (IG) bonds.
As such, it is a short duration IG bond fund, and explores investments in both the SGD and hard currencies markets with foreign currency exposures hedged back to SGD in order to mitigate the risk of currency fluctuations. As at end-September, the fund’s duration stood at only 1.4 years with an average credit rating of BBB+. In the current environment of rising rates, the fund has reinvested into much higher-yielding bonds, allowing its portfolio yield to climb to 5.3%.
Looking into the fund’s composition, we observe that it is diversified across different Asian markets (Figure 3). The largest allocation is to bonds from Chinese issuers (24%), as the fund recognises that they play a sizable and important part of the Asian fixed income universe.
We believe that there are reasons to be positive on Asian fixed income – macro tailwinds such as a less aggressive monetary policy backdrop (especially in China) and a reopening across the region should support corporate fundamentals. Plus, amidst rising growth uncertainty, the credit metrics of Asian corporate issuers have remained stable and are at healthier levels according to historical standards.
Figure 3: Diversification across different Asian markets
Within China, the fund has a preference for bonds issued by state-owned entities (SOEs) whose economic values are driven by state policies and are of great importance to the government. This view is partially being reflected in the sector allocation, whereby key sectors like financials and industrials take up the majority of the fund (>50%).
The United SGD Fund utilises a laddered investment strategy, staggering bond investments with different maturity dates across a three-year timeframe (Figure 4). This ensures a steady stream of cash flows, while enabling the fund to take advantage of higher interest rates in a rising rate environment.
Lastly, we note that the fund’s risk management is solid. Across the last five years (and since the fund’s inception), it showed a maximum drawdown of -3.6% (Figure 5). Despite posting negative returns year-to-date due to mark-to-market losses, the fund manager expects the portfolio to produce some upside as its underlying bonds approach par value upon maturity.
Figure 4: The fund aims to ride the momentum of rising rates
Source: UOB Asset Management
Figure 5: The fund has demonstrated resilience since inception
2. Nikko AM Shenton Short Term Bond Fund
The Nikko AM Shenton Short Term Bond Fund seeks preservation of capital and liquidity, and consistent with this objective, to outperform the 3-Month SGD Singapore Interbank Offered Rate (SIBOR). It does so by investing in a diversified portfolio of good quality, short-term bonds and money market instruments. This short duration IG bond fund is diversified, with China making up the highest allocation (23% of portfolio; Figure 6).
Figure 6: Allocation to China is the highest
The fund has no target industry or sector, and is not market-specific, with non-SGD positions usually hedged back to SGD. Currently, the top holdings of the fund are mostly allocated to banks due to their high credit quality and the fund’s belief of the banks having attractive valuations (Table 1). The portfolio’s average credit rating is A- (as at end-September).
Table 1: Top 5 holdings
|
Bond |
Weight |
|
DBS GROUP HOLDINGS LTD 4.52% 11-DEC-2028 |
3.1% |
|
OVERSEA-CHINESE BANKING CORPORATION LIMITED 4.25% 19-JUN-2024 |
3.0% |
|
CMB WING LUNG BANK LTD. 3.75% 22-NOV-2027 |
2.5% |
|
RHB BANK BHD. 3.766% 19-FEB-2024 |
2.4% |
|
SHANGHAI COMMERCIAL BANK LTD. 3.75% 29-NOV-2027 |
2.2% |
|
Data as of 30 September 2022 Source: Nikko Asset Management Asia Limited |
|
Similar to the United SGD Fund, the Nikko AM Shenton Short Term Bond Fund uses a laddered approach, enabling it to ride on an upswing in interest rates. The fund’s duration, which is currently at 1.1 years, is expected to be kept short due to the deployment of additional cash towards bonds with one to two years maturity. As a result, it has achieved an attractive portfolio yield of 4.9%, beating out the CPF-OA rate of 2.5% as well as fixed deposit rates.
What we believe is noteworthy about the fund is its risk management characteristics that makes it ideal as a cash parking facility. The fund’s maximum drawdown across the last five years (and since its inception), standing at -2.6%, is considered as exemplary.
Figure 7: The fund has held up well during drawdowns
3. LionGlobal Short Duration Bond
The LionGlobal Short Duration Bond seeks to generate returns in excess of the 3-Month SIBOR by investing primarily in SGD-denominated bonds. All non-SGD exposure will be hedged back to SGD, and the fund mainly invests in bonds of IG quality to lower overall default risk. The duration exposure is at 2.0 years (as at end-September), and is targeted to be kept below four years.
Essentially, the fund targets investors who wish to earn a higher yield than fixed deposits and money market funds by taking on slightly higher credit risk. Indeed, by moving up the risk ladder to an average credit rating of BBB, the fund’s portfolio currently produces a yield of 5.0%.
In line with the investment objective, its largest market allocation is to Singapore (44%; Figure 8). Singapore bonds tend to be resilient as they are mainly issued by stable corporations with healthy credit metrics. Although real estate is currently the heaviest sector, the fund has no target industry or sector. As with similar funds, the fund manager is less concerned about such allocations, and is more focused on adding value primarily through security selection, followed by the management of duration, yield curve risk, and allocation between government and corporate sectors.
Figure 8: Almost half of the portfolio is in Singapore
However, with a lower average credit quality than the two
funds highlighted above, the fund also exhibited larger downside risk. Its
maximum drawdown across the last five years was -6.1%, higher than that of the aforementioned
funds (Nikko AM Shenton Short Term Bond Fund and United SGD Fund).
Figure 9: Maximum drawdown is considered as high as compared to peers
Which fund to choose?
We believe our recommended funds will appeal to conservative investors seeking instruments that can help them obtain a yield pick-up over SGD deposits. The funds’ exposure to short duration, high-quality credits limits downside risks during market volatility, while still being able to generate a decent level of income.
Between the three different options, investors should choose those that reflect their risk appetite. Riskier funds tend to imply the potential to receive higher returns, but that also comes with a greater amount of downside risk.
For instance, the Nikko AM Shenton Short Term Bond Fund stands out as the safest option. Considering the shorter duration and higher yield, the fund, together with the United SGD Fund, also seem more attractive than the LionGlobal Short Duration Bond at the current juncture.
Table 2: Recommended funds
|
Fund Name |
Duration (years) |
Yield to Maturity |
Average Credit Rating |
|
1.4 |
5.3% |
BBB+ |
|
|
1.1 |
4.9% |
A- |
|
|
2.0 |
5.0% |
BBB |
|
|
Data as of 30 September 2022 Source: iFAST Compilations |
|||
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