Check out these bond funds included in CPFIS that can potentially offer higher yields than T-bills

• While T-bills remain a good option to invest your CPF monies in, investors looking for higher yields could explore other alternatives.

• 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 reinvested into higher-yielding bonds, allowing its portfolio yield to reach 5.3%.

• The United SGD Fund holds a long-term view to preserve capital by mainly buying into short-term and IG bonds, with a focus on Asia. It holds a portfolio yield of 5.6%.

• The LionGlobal Short Duration Bond Fund targets investors who wish to earn a higher yield than fixed deposits and money market funds. Its portfolio yield is at 5.5%.

• Overall, the fixed income market has become a more interesting place to invest in. Investors can now tap into attractive yields that have been hard to come by for years.

Have you been investing your CPF monies in search of better returns?

If you have not done so, it’s time to start thinking about it. With Singapore’s core inflation soaring past 5%, the 2.5% risk-free rate earned on your CPF-OA balances – once seen as a good deal – now barely keeps up with inflation.

Rising yields on Singapore’s Treasury bills (T-bills) have attracted the attention of investors, with an increase in T-bill applications made through the CPF Investment Scheme (CPFIS). We applaud investors who have taken advantage of this opportunity.

While T-bills remain a good option to invest your CPF monies in, investors looking for higher yields could explore other alternatives. One can consider bond funds that are included in the CPFIS, particularly those that are SGD-centric. Such funds generally invest in a diversified portfolio of short-term, investment grade (IG) bonds in the SGD and hard currencies markets, with non-SGD positions typically hedged back to SGD. Against the backdrop of rising interest rates, the funds possess the ability to reinvest into higher-yielding bonds, resulting in an average yield to maturity which have climbed to levels comparatively above that of T-bills.

Why short-dated, investment grade bonds is the best place to be

Though yields have increased substantially across the maturity spectrum, short-term bond yields have risen more than long-term bond yields. Inflation is a major driver in long-term yields. As markets seem to be underestimating the persistence of inflation, we believe long-term yields have the potential to move up further. Even if a recession comes, a Fed rate cut in 2023 seems unlikely as well.

Historically, investors would receive a yield pick-up for extending duration. This time, however, it is different. With short-term bond yields have risen more than long-term bond yields, the yield curve is relatively flat. As such, long-term fixed income investments do not sufficiently compensate investors for not only the term premium, but also the risk that inflation may be more persistent than markets are anticipating. Therefore, our preference is for shorter duration bonds.

Within fixed income, we also believe that investors should move higher up in quality. High yield bonds do offer attractive income, but it comes with greater risk of spread widening amidst the challenging macroeconomic backdrop. Opting for safer segments like IG bonds would ensure that investors can capture the higher yields from fixed income without having to take on undue credit risk.

(Related article: Stocks are no longer the only option – here’s why fixed income is coming back to focus)

Considering the above, the best place to be is in short-dated, IG bonds. Below, we highlight three recommended funds which are included under in the CPFIS to help investors prevent the real value of their CPF monies being eroded by today’s high inflation.

1.     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). To reach its objective, the fund invests in a diversified portfolio of good quality, short-term bonds and money market instruments. As at 30 November 2022, its average portfolio credit rating is A-.

Geographically, the fund holds short-duration Asian IG credits, with Singapore currently occupying the highest allocation. China and South Korea also take up relatively large weights in the portfolio (Figure 1), and such non-SGD positions usually hedged back to SGD. Currently, the top holdings remains to be the banks due to their high credit quality and the fund’s belief of the banks having attractive valuations (Figure 2).

Figure 1: Broadly diversified with Singapore currently allocated the largest weight

Figure 2: The fund allocated the most to banks

The duration exposure of the fund is relatively short, at only 1.0 year. The fund employs prudent management, by keeping portfolio duration at 3 years or less at any point in time. It is also worth noting that the fund uses a laddered approach in terms of bond maturities (i.e. buying bonds with differing maturities), which protects the fund when interest rates move up. With this strategy, the fund has reinvested into higher-yielding bonds, allowing its portfolio yield to reach 5.3% as at 30 November 2022.

Furthermore, the fund’s superb risk management characteristics makes it ideal as a cash parking facility. The fund’s maximum drawdown since its inception was -3.1%, which is one of the lowest among similar funds on our platform.

Figure 3: The fund has held up well during drawdowns

2.     United SGD Fund

Another interesting fund is the United SGD Fund. Benchmarked to the 6M Compounded SORA (Singapore Overnight Rate Average), it aims to achieve a yield enhancement over SGD deposits, with a long-term view to preserve capital by mainly buying into Asian short-term and IG bonds. The average portfolio credit rating is BBB+.

The fund explores investment in both the SGD and hard currencies markets, allowing investors to access a larger investment universe. However, foreign currency exposures are hedged back to SGD in order to mitigate the risk of currency fluctuations. Looking into the fund’s composition, we observe that it is diversified across different Asian markets (Figure 4). At present, the highest allocation is to China, as the fund recognises the market’s sizable and important role within the Asian fixed income universe.

Figure 4: Diversification across different Asian markets

Within China, the fund has a tilt towards 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 (Figure 5).

Figure 5: Financials and industrials make up nearly 50% of the portfolio

Looking ahead, with the global economy edging towards a global recession, the fund aims to maintain its preference for defensive positioning with a preference for quality credits with leading market shares and of systemic importance.

As at end-October, the fund’s duration stood at only 1.2 years as at end-November and is expected to be kept below three years. A laddered strategy also means that it has continuously reinvested into higher-yielding, shorter-dated bonds amidst the recent sharp rise in interest rates. The fund now holds a portfolio yield of 5.3%. We also note that the fund’s risk management remains solid – since inception, it showed a maximum drawdown of only -4.4%.

Figure 6: The fund weathers market downturns well

3.     LionGlobal Short Duration Bond Fund

Lastly, the LionGlobal Short Duration Bond Fund seeks to generate returns in excess of the 3-Month SIBOR by investing primarily in SGD-denominated bonds. While the fund may also invest in non-SGD denominated Asian sovereign, quasi-sovereign, bank and corporate bonds, all non-SGD exposure will be hedged back to SGD.

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. Nonetheless, the fund remains focused on credit quality to avoid default. The average credit quality is BBB+, which is classified under IG. Its weighted average yield to maturity is 5.5% as at end-November, with a duration exposure currently of 1.9 years (targeted to be below four years).

In line with the investment objective, its largest market allocation is to Singapore (Figure 7). While the heaviest sector is in real estate (Figure 8), though it should be mentioned that the fund has been prudent in its Chinese real estate credit selection in order to mitigate risks.

Figure 7: Almost half of the portfolio is in Singapore

Figure 8: The heaviest sector is real estate

However, the fund exhibited larger downside risk as compared to peers. Its maximum drawdown since inception was -7.5%, which is larger than that of the two funds highlighted above (Nikko AM Shenton Short Term Bond Fund and United SGD Fund). We think this is mainly attributed to the fund’s less defensive positioning in the past, whereby it had a lower average credit quality.

Figure 9: Maximum drawdown is larger than peers

Conclusion

Overall, we believe these short duration bond funds will appeal to investors looking for inflation-beating returns on their CPF monies. While the rising rate environment may lead to mark-to-market risk for the funds, this effect will be evened out when the underlying bonds mature (relatively soon as the bonds are of short duration). Rising interest rates would also enable the funds to continue to reinvest into higher-yielding bonds, thus pushing up their portfolio yields.

The funds are all available in the CPFIS. With the base interest rates for our CPF-OA and CPF-SA being 2.5% and 4.0% respectively, the opportunity cost of using CPF-SA monies is higher. Where possible, investors should utilise their CPF-OA monies over CPF-SA monies.

Additionally, investors ought to bear in mind that short duration bond funds tend to come with higher risk as compared to T-bills. Singapore’s T-bills are rated AAA as they are issued and backed by the Singapore government. Meanwhile, our recommended funds have an average credit rating of A- and below. Besides, unlike T-bills, your capital in bond funds is not guaranteed.

Regardless, whether be it T-bills or bonds funds, the fixed income market has become a more interesting place to invest in. Investors can now tap into attractive yields that have been hard to come by for years. At the same time, equities have become relatively more expensive as compared to bonds. With rising possibility of the world heading towards a stagflationary environment, we also believe that investors should adopt a more defensive positioning – start going back into fixed income, it is now or never.

Table 1: Recommended funds

	Duration (years)	Yield to Maturity	Average Credit Rating
Nikko AM Shenton Short Term Bond Fund	1.0	5.3%	A-
United SGD Fund	1.2	5.3%	BBB+
LionGlobal Short Duration Bond Fund	1.9	5.5%	BBB+
Source: iFAST Compilations Data as of 30 November 2022