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Top Fixed Income Funds 2016: High Yield Strikes Back!
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Top Fixed Income Funds 2016: High Yield Strikes Back!

In this annual performance update, we take a look at some of the best-performing fixed income funds on the platform as well as some of the laggards for the year just ended.

2016 was a tumultuous year for fixed income, keeping many investment professionals on their toes as they navigate a broad-based decline in yields and spreads for most of the year before seeing yields rise throughout the fourth quarter. Equity markets performed well in 4Q 16, whereas most areas of the bond market saw a sell-off. The average return of all bond funds on our platform, as gauged by the FSMI All Bond index, came in at a mere 0.52% in 4Q 16, but clocked a 6.13% return for the full year. Singapore bond funds were the bottom performer in 4Q 16, with the FSMI Singapore Bond index declining -2.15% to end 2016 with a 3.06% gain. Global bond funds fared slightly better, with the FSMI Global Bond index posting a 3.62% return in 2016.

As compared to the performance seen in 2015, high yield bonds saw a gradual decline in yields and spreads and rebounded for the year, clocking a strong 13.22% return in 2016 (the FSMI High Yield Bond index gained 3.17% in 4Q 16). While emerging market bonds also sold off alongside the safer segments of fixed income markets in the fourth quarter of 2016 (-1.23% loss), they recorded a 7.43% gain in 2016, behind the average return for high yield bond funds on the platform.

In this annual performance update, we take a look at some of the best-performing fixed income funds on the platform as well as some of the laggards for the year just ended.

Table 1: FSM Fixed Income Fund Indices

Fund Index

4Q 16

2016

FSM Indices – High Yield Bond

3.17%

13.22%

FSM Indices – Emerging Markets Bond

-1.23%

7.43%

FSM Indices – All Bond

0.52%

6.13%

FSM Indices – Global Bond

1.50%

3.62%

FSM Indices – Singapore Bond

-2.15%

3.06%

Source: iFAST Compilations, data as of end-December 2015 in SGD terms, with dividends reinvested

High Yield Outshined The Rest In 2016!

Bond yields rose across the board throughout 4Q 16, causing a reversal of the trend (declining yields) that dominated for much of 2016. High yield bonds as whole saw a lesser magnitude in terms of yield increases relative to other bond market segments, outperforming their counterparts and benefitting from rising expectations of improving economic momentum in the developed markets (like the US). Reversing from underperforming in 2015 to outshining in 2016 as yields and spreads fell since early February 2016, funds invested in the high yield debt markets this time round came in at the top of the performance ladder.

US high yield bond funds like Eastspring Inv US High Yield Bd USD A, Legg Mason WA US HY Bd Cl A USD (mdis) and PIMCO US High Yield Bond Cl E Acc USD posted positive returns in 4Q 16 and registered gains of 18.67%, 16.99% and 16.23% respectively in 2016. Many bond funds that came in at the top of the ladder also benefited from currency gains due to the strengthening of the USD against the SGD last year (+2.14%), slightly boosting returns of underlying USD-denominated debt from a SGD-perspective. Emerging market bond funds that primarily invest in USD-denominated issues benefited from both the currency translation as well as the underlying performance of emerging market debt market, where we saw a broad-based decline in yields across the investment grade and non-investment grade segments throughout most of 2016.

Table 2: Top Performing Fixed Income Funds In 2016

Fund Name

4Q 16 Returns

2016 Returns

Segment

Eastspring Inv US High Yield Bd USD A

7.03%

18.67%

US High Yield

Legg Mason WA US HY Bd Cl A USD (mdis)

7.33%

16.99%

US High Yield

Eastspring Inv Asian HY Bd NZD ANDM (H)

0.69%

16.61%

Asia High Yield

Allianz US High Yield AM H2-AUD

1.94%

16.42%

US High Yield

Legg Mason WA Global HY A AUD H (mdis) plus

1.05%

16.32%

Global High Yield

PIMCO US High Yield Bond Cl E Acc USD

7.76%

16.23%

US High Yield

PIMCO Emerg Mkt Bond Cl E Acc USD

3.49%

16.07%

Emerging Market Bond

Deutsche Invest I Emg Mkt Corp LDM USD

4.99%

16.02%

EM Corporate Bond

Neuberger Berman High Yield Bd A USD Acc

6.89%

15.97%

US High Yield

Fidelity US High Yield AMDIST USD

7.54%

15.92%

US High Yield

Source: Bloomberg, iFAST Compilations, data as of end-December 2016 in SGD terms, with dividends reinvested

Sterling's Weakness Still Lingers

As a whole, most fixed income funds had a relatively decent performance last year. Bond funds which suffered underwhelming returns in 2016 were mostly affected by the movements in foreign exchange markets (foreign currency movements against the SGD), as volatility rose across various currency pairs last year, affecting and skewing bond returns. In particular, the British Pound (GBP) has been one of 2016's weakest performing currencies (against the SGD and the USD) as markets reprice a Britain as a non-EU member since June's referendum.

While Sterling had somewhat stabilised in 4Q 16, it fell -14.51% against the SGD for the full year of 2016. Bond funds on the platform that invested in GBP-denominated assets or operate with a GBP currency hedge took a hit from Sterling’s depreciation. Fidelity Flexible Bond A GBP, a fund which invest in the GBP sovereign and corporate debt market, benefited from monetary easing by the Bank of England (BOE) but ended up at the bottom of the ladder due to GBP’s weakness against the SGD. Other funds such as Allianz Flexi Asia Bond Cl AM Dis H2-GBP, PIMCO Glb Inv Gr Credit Cl E Inc GBP Hed and Blackrock Global High Yield Bd A2 GBP-H, which operate with a GBP hedge, incurred losses of -9.72%, -9.22% and -4.27% respectively in 2016. Additionally, the few funds available that invest in the Chinese onshore debt markets also had their performance partially affected by currency movements (the CNH weakened against the SGD by -3.94%) - LionGlobal RMB Quality Bd Fd A Dist SGD and Nikko AM China Onshore Bond Fund RMB posted losses of -6.32% and -3.21% respectively last year.

Table 3: Bottom Performing Fixed Income Funds In 2016

Fund Name

4Q 16 Returns

2016 Returns

Segment

Blackrock Global Corp Bond A3 GBP-H

-2.44%

-11.08%

Global Corporate Bond

PIMCO Glb Bond Cl E Inc GBP Hed

-0.98%

-10.54%

Global Bond

Allianz Flexi Asia Bond Cl AM Dis H2-GBP

-1.44%

-9.72%

Asia Bond

PIMCO Glb Inv Gr Credit Cl E Inc GBP Hed

-1.08%

-9.22%

Global IG Bond

LionGlobal RMB Quality Bd Fd A Dist SGD

-0.52%

-6.32%

RMB Bond

Fidelity Flexible Bond A GBP

-1.04%

-6.24%

Sterling Bond

Blackrock Global High Yield Bd A2 GBP-H

2.45%

-4.27%

Global High Yield

Blackrock Emerging Mkts Bond A2 GBP-H

-1.54%

-3.96%

Emerging Market Bond

Allianz Dynamic Asian HY Bd Cl AMg Dis H2-GBP

0.62%

-3.32%

Asia High Yield

Nikko AM China Onshore Bond Fund RMB

-0.54%

-3.21%

RMB Bond

Source: Bloomberg, iFAST Compilations, data as of end-December 2016 in SGD terms, with dividends reinvested

Going Defensive On Fixed Income…

We went into 2016 with a neutral stance of equities relative to bonds, but for this year, we are shifting our asset allocation call to being overweight equities vis-à-vis fixed income (as mentioned in our outlook for 2017). Despite a general rise in bond yields throughout the fourth quarter of 2016, valuations for many segments of global bond markets leaves us cautious, and alongside the current lack of attractive opportunities in the fixed income landscape as well as diminishing prospects of new aggressive measures by major central banks globally, we are of the opinion that investors should go defensive on fixed income in 2017. Capital preservation should be the priority, and having exposure to the short duration space for example, would be prudent in the current regime of Fed tightening as well as high duration risks in the G7 sovereign space.

Additionally, our yearly-event of What & Where To Invest 2017 is coming soon! Come down to mingle with us and seek out the best investment ideas Fundsupermart and other esteemed Asset Management houses have to offer and what other insights they have to offer!


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