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Understanding The Fund: Eastspring Investments Funds – Monthly Income Plan

Joanna Ong, Investment Director of Global Asset Allocation at Eastspring Investments (Singapore) Pte Ltd, shares with Fundsupermart how the Eastspring Investments Funds' Monthly Income Plan is positioned for 2013.

1. The Eastspring Investments Funds' Monthly Income Plan invests in both Asian bonds and US high yield. What is your outlook for these two fixed income segments and how is the fund currently positioned between them?

The US economy remains in a deleveraging cycle characterised by anaemic growth. Policy rates in the US are likely to remain close to 0. With credit spreads already tight and absolute credit yields low, the risk-return characteristics for credit as an asset class have turned much less attractive. Historically, US high yield bonds had been less susceptible to any upward yield correction. Given the strong fundamentals of US companies, with sound credit metrics and low refinancing needs over the next few years, I favour US high yield over Asian dollar bonds at the moment.

2. The fund has the flexibility to allocate up to 20% of its assets in other Asia Pacific investments. Under what conditions will the fund utilise this option?

The Fund has on average maintained a 5% allocation to equities which will vary depending on our macro market view and valuations. These stocks tend to be companies with high dividend payouts, visible cashflows, manageable balance sheet profile, and can deliver attractive dividends. They tend to exhibit lower volatility and this strategy of enhancing dividend income has worked well. They also provide potential capital gains.

3. How did the fund perform in 2012 and what were the main performance drivers?

The Fund gained 14.19% in 2012, driven mainly by the US high yield and Asian US dollar denominated bonds, which performed in line with global equities and ahead of global government bonds and commodities. High dividend yielding stocks and REITs also contributed to performance. The gain in the bonds portfolio was driven mainly by a contraction in credit spreads, which has fallen by about 200bps over the year. This has brought about substantial (unrealised) capital gains, and coupled with the 'carry' coupon, resulted in the strong Fund return for the year.

4. On the back of such strong returns over the last year, is it too late for new investors to buy into the fund now?

Following the rally in 2012, credit yields have declined (risk compensation has narrowed), making this asset class less attractive. Nevertheless, credit spreads may still be attractive if one takes into consideration the strong corporate fundamentals and reduced levels of expected defaults. However, ongoing macro concerns will continue to cloud the outlook for credit markets, especially US high yield, which is vulnerable to growth expectation downgrades and risk aversion. With credit spreads already at historical averages, and government yields at multi-decade lows, a repeat of the double-digit returns for credit markets is unlikely. Nonetheless, it is unlikely that credit markets suffer a massive sell off as corporates are in much better shape, credit valuations are not as expensive, and correction in the housing and sub-prime debt sector is now well-advanced, reducing systemic risks.

Yield is an important component of an investor's portfolio as it tends to be more predictable and less volatile compared to capital value moves. In an uncertain environment, an income product focusing on stable yield may be the preferred strategy, especially for investors who prefer to avoid equity market risks. The blended SGD hedged yield generated by the Fund's underlying assets is sufficient to meet the target payout of 5 cents per unit.

Broadcast Date 15 February 2013
Video Duration 00:06:41
Programme Understanding The Fund: Eastspring Investments Funds – Monthly Income Plan
26 Ratings Views: 3555 Language: English Comment (0)
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