In the last year, bond funds have become very popular with Fundsupermart investors. Investors have been buying global bond funds at a time when global interest rates are trending up. Since bond prices fall when interest rates rise, why is there increasing interest in global bond funds?
We think the reason is two fold. The performance of global bonds funds (shown below) ilustrates the fact that they can deliver positive and relatively stable returns, even in difficult economic environments. This is perhaps a little easier for absolute return global bond funds, that have a wide investment mandate and are not restricted by benchmark considerations. That means if interest rates are headed up, and the US dollar is falling, these funds aren't obliged to hold US government bonds, simply because they are a large part of the global bond market. They have the option of investing in emerging market bonds, or other types of higher yielding bonds, which may be more affected by economic fundamentals rather than rising interest rates. Another reason for their popularity is grounded in asset allocation: it's a fact that global bond funds do add stability to an all equity portfolio (click here to read a related article).
The top selling bond funds at Fundsupermart include the FTF-Global Bond Fund, DBS Shenton Income and the OCBC Global Bond. All three funds are absolute return focused unit trusts. But what are the salient differences between them?
Here's a snapshot of all three funds:
DBS Shenton Income
The DBS Shenton Income fund is an absolute return bond fund that invests in a combination of investment grade debt (BBB credit rating and above), and non-rated bonds. Non-rated bonds are corporate bonds that have no risk classification, and these are largely Singapore corporate bonds. It can invest up to 10% of its holdings in sub-investment grade bonds (those with a rating below BBB by Standard & Poor's). The fund manager can also invest in locally denominated debt, for example Indonesian bonds denominated in rupiah. He can invest in both government and corporate bonds. as at end March 2005, 45% of the fund is government and government agency bonds. The latter refers to supranationals. The fund has around 5% in supranationals, which are bonds issued by entities such as the World Bank.
The duration of the fund is around 3.6 years, and about 28% of the fund is in bonds with a BBB rating (as at end March 2005). Around the end of last year, the fund had under half its holdings in bonds with a BBB rating. Because of recent developments in the global bond market, the fund manager has shifted more into higher credit quality bonds. Now, slightly more than 60% of the fund is in bonds with a rating of AAA or AA. The average yield to maturity is 6%. The fund can trade to capitalize on price appreciation. The fund manager frequently sells bonds before the maturity date to lock in a profit. The fund house adds that risk is controlled through portfolio diversification. The fund has almost 200 bonds in its portfolio, and this is spread across a wide variety of countries and sectors. Any country that forms less than 4% of the fund is classified under 'Others'. The fund has around 40% of its holdings in this category.
DBS Shenton Income is not CPFIS registered, and that's because the fund can invest in bonds with a rating below BBB-, at the discretion of the fund manager. According to CPF guidelines, funds that invest in such sub-investment grade bonds cannot apply for the CPF Investment Scheme (CPFIS).
FTF - Global Bond Fund
The Franklin Templeton Funds is another absolute return feeder fund. The mother fund invests in government bonds. Like the Shenton Income Fund, this fund can also invest in locally denominated debt. The fund currently invests in regions outside of the US, in places such as Eastern Europe, Scandinavia and Asia. The fund manager is cautious on the US citing the national budget deficit and the weakness is the US dollar, as reasons to avoid US government credit.
More than three-quarters of the fund is in investment grade debt, with an average credit quality of A+. The average duration for bonds in the portfolio is 3.22 years, and the average yield to maturity is around 4.14% (figures as at end 31st March 2005). The fund assesses risk based on three broad factors: interest rates, currency and yield. The fund at present, has no exposure to US government bonds. However 11.6% of the currency exposure is in US dollars and that comes from non-US debt (i.e Latin American sovereign bonds) denominated in US dollars. The highest currency exposure by country is in Korean Won. Three of the top 10 holdings are Korean Treasury bonds.
Other top holdings in fund include Polish, Swedish and Argentinian government bonds. The fund is not registered under the CPF Investment Scheme for the same reasons as the Shenton Income Fund (see above). While the fund is focused on absolute returns it does have a primary benchmark, the JP Morgan Global Government Index. According to Templeton Asset Management, the fund uses the benchmark for comparison purposes, but the fund manager is not constrained by the index.
OCBC Global Bond
OCBC Global Bond is an absolute return unit trust with an aim to maximize total returns in the medium to long-term through investments in Singapore and international bonds, and other high quality interest rate securities. Although there is no target industry or sector, the investment process incorporates both the 'top-down' and 'bottom-up' approaches. The fund, which is registered under the CPF Investment Scheme for the CPF Ordinary Account ("Ordinary Account") and CPF Special Account ("Special Account"), chooses not to invest in other emerging markets. That's because markets such as Latin America and Eastern Europe, carry higher economic and political risk than developed G7 markets, says OCBC Asset Management. This fund tends to be more focused on capital preservation. When compared with other global bond funds in the market, the fund house says that this fund tends to be managed more conservatively.
According to the fund house, 19% of the fund is allocated in USD and 64% in SGD as at end March 2005. This is partially due to the fund's defensive view of bond markets in the next 3 to 6 months. Besides being short on duration, the fund strategy for now involves having a lot of Singapore dollar exposure, and less in foreign currency to minimize exchange rate risk. The average duration for the fund is 2.83 years, and the average yield for the portfolio is 3.87%. The fund has a concentrated portfolio of 30-35 holdings. Around 35% of the bonds in the fund are rated either Aaa or Aa3 by Moody's. It's benchmark is the the 1-month SGD Inter-bank bid rate. According to OCBCAM, this index was chosen as the benchmark as the fund's objective is to deliver positive returns.
BOND FUND MATRIX
The bond fund table below captures at a glance most of the differences between the various bond funds, mentioned above.
*Sub-investment grade is defined as credits with a rating below BBB- by Standard & Poor's
Government or Corporate Bonds
Investment/Sub-Investment Grade Bonds*
Absolute return focused
OCBC Global Bond
Yes (OA & SA)
FTF- Global Bond
Bond funds help to stabilize risk in an investment portfolio. The bonus of absolute return global bond funds, such as those mentioned above, is that they are focused on positive annual returns, rather than just outperforming a benchmark. And even if funds such as the FTF-Global Bond Fund and the Shenton Income invest in high yield or emerging market bonds, they offset the risk by investing in a well-diversified portfolio of around 200 holdings. Thus global bond funds make a good addition to a well-diversified investment portfolio.
The pie chart above illustrates where global bond funds belong in an overall portfolio. The percentage which should be allocated to global bond funds is dependent on an individual's risk profile. The diagram below shows the asset allocation for a balanced investor, and may not reflect an individual's risk/return profile. (To view investment portfolios tailored for different risk profiles, click here for our Fundsupermart Recommended portfolios).
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'No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimers.'