Hunting for attractive yields? Here’s three fixed income funds to consider in 2024.

• The fixed income asset class remains an integral part of any diversified portfolio, especially with bond yields looking the most attractive in recent years.
• Our recommendation within the “Money Market” category is the Fullerton SGD Cash Fund, which primarily invests in SGD deposits, and is our recommendation for investors aiming to minimise their duration exposure while still earning attractive yields.
• For a short-duration bond exposure, our first recommendation is the Nikko AM Shenton Short Term Bond Fund, which stands out for its focus on quality, solid track record, as well as its high liquidity with a redemption schedule of T+1.
• Alternatively, our second recommendation is the United SGD Fund, which stands out also for its focus on quality, on top of its solid track record since inception, and the availability of both accumulation and distribution share classes depending on investor needs.

Bond yields across many markets are at their highest in many years, especially compared to the near-zero cash rates we saw just several years ago. We think the fixed income asset class remains an integral part of any diversified portfolio, and shine the spotlight on three funds which are among our top picks within fixed income.

Related article: Why we continue recommending Short Duration Bonds in 2024

1. Fullerton SGD Cash Fund A SGD

One of our recommended funds with one of the shortest duration exposures (on our platform) is the Fullerton SGD Cash Fund.

The Fullerton SGD Cash Fund is our recommendation in the “Money Market” category and aims to provide investors with liquidity and a return that is comparable to that of the Singapore Dollar Banks Saving Deposits rate. It invests primarily in SGD deposits with eligible financial institutions as defined by the MAS, with maturities not more than 366 calendar days (i.e. 1 year); however, it may also invest up to 10% of fund NAV into deposits with maturities between 1 and 2 years.

(Note: From 1 Feb 2024 onwards, the fund’s mandate will be explicitly revised to allow for investments into Singapore government-related bills. From that date onwards, it may also enter into repurchase transactions for efficient portfolio management.)

Based on the latest available data (e.g. factsheets), its top counterparties (for bank deposits) are a mix of foreign banks originating from different countries (Table 1). Together, its top 5 counterparties account for over 60% of the fund’s NAV, including two G-SIBs based in Japan (Sumitomo Mitsui and MUFG). While this may seem concentrated at first glance, we do not find this concerning given (i) the high quality of bank names involved; and (ii) the limited universe of appropriate counterparties.

In terms of maturities, a large majority of its deposits (83.7%) have less than (or equal to) 4 weeks to maturity (Table 2). The fund has also indicated that its weighted average maturity (WAM) was about 39 days as of 29 Dec 2023. Given this, we expect the fund’s ‘duration’ to be around one month, making it one of the shortest-duration funds on our platform.

In terms of yields, the fund has indicated that its gross indicative yield (as of 29 Dec 2023) was 3.98%, with a 5-day rolling average of 4.03%. Subtracting this gross yield by an expense ratio of 0.15% should give a net indicative yield of 3.83% (5-day rolling average of 3.88%), representing a fairly attractive yield considering the low risks involved.

(Note: From 1 Feb 2024 onwards, the fee waiver of this fund will be trimmed from 0.15% to 0.09%. Consequently, investors should expect the expense ratio of the fund to increase by a similar amount, and for the net yield to decrease by a similar amount.)

The fund has delivered solid returns over the years, with a 5-year annualised return of 1.7% (as of 31 Dec 2023). In the past year, returns have been further enhanced by the higher-rates environment, allowing the fund to deliver an annualised return of 3.9% in 2023. With the prospect for higher-for-longer rates (especially for shorter-end policy rates), we expect the fund to continue delivering solid returns.

In addition, this fund’s returns have been extremely consistent, with just 10 days where we observed a decline in NAV (since inception in 2009) (Chart 1), and a lifetime maximum drawdown of -0.017% (-0.005% in the past 5y) (Table 3)). The fund has shared that the decline was NAV was primarily due to fund accounting (e.g. redemptions), rather than any significant deteriorations or defaults in its holdings.

To summarise, the Fullerton SGD Cash Fund continues to be our top Money Market pick and is our recommendation for investors who wish to minimise their duration exposure while earning attractive yields of close to 4%. We like its extremely solid track record, with its extremely low historical maximum drawdown.

Related article: Fullerton SGD Cash Fund – The king’s throne for your cash

Table 1: Top 5 counterparties for Fullerton SGD Cash Fund

Table 2: Most of its holdings have less than 4 weeks to maturity

Chart 1: Fund’s NAV has been on a consistent uptrend since inception

Table 3: Fund has delivered solid returns with extremely low maximum drawdown over the years

2. Nikko AM Shenton Short Term Bond Fund

Investors looking for slightly higher indicative yields while maintaining a fairly short-duration profile can consider our two recommended funds within the “Singapore-Centric” category.

The Nikko AM Shenton Short Term Bond Fund is one of our two recommendations in this category. This fund aims to preserve capital and liquidity while outperforming the 3m SIBOR. It invests primarily in a diversified portfolio of good-quality short-term bonds and money market instruments.

While the fund has a global mandate, it mainly concentrates its holdings within Asia (Chart 2). Its holdings are well-diversified within the region, with China, Singapore, and South Korea accounting for its 3 largest geographical allocations. This mirrors the broader Asian fixed income universe – in our correspondence with the fund, the managers have specifically expressed more positivity on Asia-ex-China growth.

We like that the fund appears to be focused on quality, helping to support its objective of preserving capital – this is reflected in its solid average credit rating of A-. We observe that its largest sectoral allocations are into various Financials companies including Banks (38.2%) and Diversified Financials (9.2%) (Chart 3); within banks, the fund managers have expressed a preference for those with strong earnings, stable deposit bases, and robust capital ratios. Apart from that, the fund managers have also expressed optimism about insurance companies with a solid market position, low product risks with a strong focus on protection solutions, and credits that are of systemic importance. We think investors can expect a stable performance from this fund while benefiting from the decent portfolio yield to maturity of 5.1%.

Another key reason we like this fund is its relatively short-duration profile, with a focus on short-term issues of less than 5 years. The fund currently has a weighted average duration of 1.11 years; for reference, our usual proxy for Asian IG bonds [Bloomberg Asia USD IG Index] has a duration of around 5+ years. This short-duration approach coupled with its laddered approach to investing help the fund remain resilient even in a higher-for-longer rates environment.

Some other positives of this fund include its solid track record both in terms of performance and maximum drawdown (since inception), as well as its short redemption period of T+1. In summary, we believe this fund is best suited for investors who are looking for a fairly stable product, but are willing to take slightly higher risks over very-safe alternatives (e.g. Fullerton SGD) for the prospect of slightly higher returns.

Chart 2: Fund’s holdings are concentrated in Asia

Chart 3: Fund has a significant allocation towards Financials companies

Table 4: Fund has shown a relatively low maximum drawdown since inception

3. United SGD Fund

Our other recommendation within the “Singapore-Centric” category is the United SGD Fund. Similar to the previous fund, the United SGD Fund aims to preserve capital over the long term and achieve a yield enhancement over SGD deposits. It also has a cash-based benchmark – 6m SORA. This fund also expects to primarily invest in money-market and short-term interest-bearing debt instruments and bank deposits.

This fund focuses on global investment-grade bonds, with its holdings also tilted towards Asia, particularly China, Singapore, and South Korea (Chart 4). This again mirrors the broader Asian fixed income universe – in our previous correspondence with the fund, the managers continued to express caution on the Chinese property and China LGFV segments specifically.

Based on our correspondence with the fund managers, the fund continues to emphasise quality and defensiveness which is in line with our house view. For instance, the managers have highlighted a preference for defensive sectors and/or companies with defensive business models, and we think this is reflected in the sizeable 13% allocation to Utilities (second-largest sectoral exposure) (Chart 5). Other themes they have mentioned include staying up in credit quality, as well as selecting credits with leading market shares and/or being of systemic importance. Overall, these allocations should help to support the stability of returns over the medium-long term in our view, particularly with its decent portfolio yield of 4.82%.

This fund also remains relatively light in duration with an effective duration of 1.12 years. The team adopts a laddered approach to investing, making it more resilient to the effects of higher-for-longer rates.

Apart from its focus on quality and light duration exposure, the fund stands out from its peers with its solid historical performance and low maximum drawdown since inception as well. Furthermore, investors looking for regular income can benefit from the fund’s selection of various share classes, including Class A (targeting 4% p.a. distributions) and Class S (targeting 5% p.a. distributions). Once again, this fund is best suited for investors who are looking for a fairly stable product, with slightly higher yields (at slightly higher risks) over safer alternatives.

Chart 4: United SGD Fund is concentrated in Asia credits

Chart 5: Apart from Financials, United SGD Fund has a sizeable allocation into Utilities

Table 5: United SGD Fund has delivered stable returns over the long-term

Which product should you pick?

For risk-averse investors, we see Fullerton SGD Cash Fund as the safest and most liquid option for delivering stable returns.

Investors with slightly higher risk appetites can consider either of the two short-duration funds above (Nikko AM Shenton Short Term Bond Fund / United SGD Fund) for the prospect of potentially higher returns. The choice between these two funds will depend on each investor’s preference. Some factors to consider include one’s risk profile (e.g. United SGD Fund has shown a better since-inception performance, though this has come with a higher maximum drawdown), liquidity needs (Nikko AM: T+1 / United SGD: T+4), as well as the desire for distribution share classes (which United SGD Fund offers).

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.