Q&A Series: Navigating High Inflation: The Strategic Role of Short Duration Bonds in Your Portfolio

iFAST Financial Pte Ltd (“iFAST”) is a wealth management platform providing investment administrative services and a wide range of investment products to its business-to-business (“B2B”) and business-to-consumer (“B2C”) clients. As of 30 June 2023, the iFAST Group manages total assets under administration of approximately S$18.8 billion, whilst the total assets under management of its fund management business is approximately S$1.3 billion. 

Eastspring Investments (Singapore) Limited (“Eastspring Singapore”), part of Prudential plc, is a leading Asia-based asset manager that manages over USD 216 billion (as of 30 September 2023) of assets across equity, fixed income, multi asset solutions and quantitative strategies. Eastspring Singapore was appointed by iFAST as the sub-manager for the iFAST-Eastspring Lion Bond Fund in July 2022.

In this edition of our Q&A Series, we take a deeper dive into the IFAST-EASTSPRING LION BOND A SGD (“Fund”). We are very pleased to have the fund managers share their insights on the Fund, for investors looking to navigate the impact of high inflation on their portfolios via short duration investment grade bonds.

1) Understanding the Inflation Challenge

High inflation erodes the purchasing power of money over time, posing a threat to the real returns of traditional investments. As central banks grapple with the complexities of monetary policy, investors are actively seeking instruments that can act as a hedge against the erosive effects of inflation.

2) What are short duration bonds and why are they relevant?

The last few years were marked by heightened concerns about rising inflation where investors faced the challenge of preserving their wealth while seeking opportunities for growth. Amidst this economic landscape, short duration bonds emerge as a strategic asset class, offering a unique set of benefits to investors looking to navigate the impact of high inflation on their portfolios.

Short duration bonds, with their shorter maturities, exhibit a unique resilience in the face of inflationary pressures. Unlike longer-term bonds, which may experience more significant price declines in a rising interest rate environment, short duration bonds are less sensitive to interest rate changes. This characteristic positions short duration bonds as a valuable tool for investors seeking to mitigate interest rate risk and to preserve capital in the context of inflationary trends.

In an environment such as the current one where inflation is already high and is not expected to balloon much more going forward, short duration investment grade bonds lend stability to investors’ portfolios. At the same time, short duration bonds also benefit from the inverted yield curves in many countries where yields at the shorter end of the yield curve are higher than yields at the longer end of the yield curve. This results in short duration bonds which are relatively stable yet also have attractive carry.

3) What are the unique features of the iFAST-Eastspring Lion Bond Fund?

One of the key distinguishing factors of the iFAST-Eastspring Lion Bond Fund lies in its commitment to maintain a portfolio of short duration bonds which all have a minimum credit rating of A-. In an environment where investors are often faced with the challenge of balancing risk and return, our fund sets itself apart by prioritizing high-quality investments. This not only minimizes the credit risk associated with the portfolio but also provides investors with the peace of mind that comes from investing in securities with a strong track record of financial stability.

This unique fund not only boasts a diversified portfolio of liquid bonds, all rated at least A-, but also thrives in the face of market volatility, providing investors with a rare combination of security and high-interest yield in the current investment climate.

As investors grapple with the challenges posed by high inflation, short duration investment grade bonds emerge as a compelling solution to preserve capital, manage interest rate risk, and maintain portfolio flexibility. By strategically incorporating short duration bonds into their investment portfolios, investors can navigate the complexities of the current economic landscape while striving to achieve a balance between capital preservation and growth. In an era defined by inflationary pressures, the versatility and resilience of short-duration bonds position them as an asset class for investors seeking a prudent and dynamic approach to wealth preservation.

4) How would you describe your investment and credit selection process?

There are four stages in our investment process, which combines both a top-down and bottom-up investment analysis to identify value opportunities: 

Stage 1. Investment Outlook Analysis: Macroeconomic and market research is conducted to determine the investment outlook and assess the fair value of the broad interest rate, credit and currency markets.

Stage 2. Strategy Formulation: Fundamental, valuation and technical analyses of relevant markets from both top-down and bottom-up perspectives are combined to determine the portfolio’s credit, interest rate and currency strategies.

Stage 3. Portfolio Construction: The portfolio is constructed in line with the duration/yield curve, sector, credit and currency risk preferences of the team, as well as the relevant investment restrictions and objectives.

Stage 4. Risk Control and Review:  The portfolio’s risk exposures are reviewed regularly, with independent oversight from the Portfolio Risk and Investment Risk teams.

Our credit selection process begins after the top-down and sector outlooks are established. Bottom-up credit analysis is conducted by our team of analysts, which forms the basis of credit recommendations to the portfolio managers. This involves the analysis of the business and financial profile of each issuer so that the key strengths and weaknesses of the issuer can be identified. Financial profile analysis includes an assessment of the issuer’s financials, such as profitability, cash flow, debt profile and liquidity position. We also assess the Environmental, Social and Governance (ESG) risk factors and their materiality on an issuer’s financial performance, its risk of default, and bond valuation.

5) Are there any broad themes that your fund managers see emerging in 2024?

We expect global growth to slow going into 2024 as the lagged cumulative effects of monetary policy tightening start to kick in especially in the developed economies. With slowing growth, inflation should continue to trend downwards in the year ahead barring a commodity shock. Therefore, global central banks are likely to be at or close to the end of their rate hiking cycles.  While a pivot could be some months away, a broad and sustained decline in inflation could usher in a turning point for bonds.  We retain a quality bias in US and Asian bonds at this late stage of the economic cycle.

In addition, Singapore dollar (SGD) bonds in the portfolio offer attractive absolute yields that are trading at an attractive multi-year high and the SGD is generally perceived to be a “safe haven” currency with lower volatility.  Investors’ preference for high quality assets in a stable currency continues to benefit SGD bonds.

Disclaimer
The information provided herein are subject to change at the discretion of the Investment Manager without prior notice. Any prediction, projection, or forecast on the economy, securities markets or the economic trends of the markets is not necessarily indicative of the future performance of Eastspring Singapore or any funds managed by Eastspring Singapore. Whilst we have taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness. Any opinion or estimate contained in this document is subject to change without notice.

All material and content are strictly for informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found in this presentation. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this presentation is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the unit trusts and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our full disclaimer in the website.

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