As mentioned in previously in last week’s Idea of The Week: Afraid of Investing in Europe? [11 May 12], Eurozone concerns have flared up once again, sending volatility rising and global equity markets southwards. While we highlighted 3 different ways to invest in Europe previously, in this week’s edition of Idea of the Week, we turn towards home and look at 4 Singapore Bond funds, with different levels of risk appetite, which could help investors stabilise their portfolios with SGS bond exposure, a safe-haven in this time of rising volatility and growing market risks.

1. Eastspring Investments Unit Trusts – Singapore Select Bond fund

• Neutral-to-Long Duration positioned
• 60% of portfolio in investment grade bonds, At least 37% in safe-haven SGS bonds
• CPF OA/SA approved
• Managed from a SGD perspective, non-SGD exposure will be hedged
• An aggressive Singapore bond fund

The Eastspring Singapore Select Bond Fund offers exposure to the Singapore debt market and is largely invested in SGS bonds, with at least 37% of its portfolio in said securities while it has the ability to invest up to 30% in foreign denominated debt if opportunities arise and can invest in both Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS) to enhance its yield. The Singapore Select Bond fund currently holds 60% of its portfolio in investment grade bonds, while at least 37% of its holdings are in safe-haven SGS bonds.

Alongside credit selection, the manager also uses duration management to help generate alpha. The fund is currently positioned towards the neutral-to-slightly-long duration spectrum, which should enable it to profit as yields get further beaten down. The fund is managed from a SGD perspective, while non-SGD exposure will be hedged, thus, investors should be relatively well-shielded from currency fluctuations.

2. Legg Mason Western Asset Singapore Bond Fund

• Neutral-to-Long Duration positioned
• 52% in safe-haven SGS bonds
• High quality corporates help to enhance yield
• CPF OA/SA approved
• Alternative to directly investing in sGS bonds
• A moderately aggressive Singapore bond fund

Legg Mason Western Asset Singapore Bond Fund offers investors an alternative to directly investing in SGS bonds, with the benefits of credit enhancements as well as improved diversification. With the objective of achieving yield enhancement by outperforming their bench mark (a pure SGS bond index), the inclusion of high quality corporate bonds such as the likes of Sembcorp, OCBC and even quasi-sovereigns like HDB has seen the fund fulfill its objectives.

Similar to the Eastspring fund, credit selection and duration management are expected to help drive returns. The fund is currently positioned neutral-to-slightly overweight duration as they anticipate a flattening yield curve as a result of rising safe-haven demand for SGS bonds which should see the fund benefit as yields decline.

3. LionGlobal Singapore Fixed Income investment class a

• Short Duration positioned
• 33% in safe-haven SGS bonds
• High quality corporates help to enhance yield
• CPF OA/SA approved
• Alternative to directly investing in sGS bonds
• A balanced Singapore bond fund

The LionGlobal Singapore Fixed Income Investment Class A provides investors with a good mix of both SGS bonds as well as high quality corporate bonds. Investors who inspect the factsheet may note the high allocation to “non rated” credits (46.1%), however this doesn’t translate into non-investment grade exposure. The “non rated” segment is expected to encompass mostly high quality credit securities; the “non rated” nature of many fixed income securities in the local context is often attributed to the issuer’s reluctance to obtain a credit rating, rather than being representative of a lower quality issue.

Like the 2 preceding funds, returns are driven by both credit selection as well as duration management. At the time of writing, the managers expect interest rates to remain range bound, albeit with a gradual upward bias. Under such forecasts, the managers have opted for a short duration stance in the portfolio, while also incorporating a trading approach to generate alpha from shorter-term duration changes. It's short duration positioning should see the fund take advantage of rising interest rates in the years to come.

4. Schroder Singapore Fixed Income Fund

• Short Duration positioned
• 70% in safe-haven SGS bonds
• NO non-investment grade positions
• CPF OA/SA approved
• Alternative to directly investing in sGS bonds
• A defensive Singapore bond fund

Like its peers before it, the Schroder Singapore Fixed Income Fund provides investors with a good mix of both SGS bonds and high quality debt. We note the fund’s investment focus is on issuers with credit ratings that are within the investment grade rating scale, although “non rated” issues maybe invested in as well, similar in principle to the LionGlobal Singapore Fixed Income fund. Based on communication with Schroder, the fund is intended to only outperform its specified benchmark (a pure SGS bonds benchmark), and not to take on excessive risk in search of high yields.

Based on end December 2011’s annual report, the majority of the fund (70.3%) was allocated to Singapore government bonds, suggesting that the portfolio’s overall credit quality is likely to be high (Singapore sovereign debt currently possess the highest possible credit rating). Given its defensiveness, we expect the fund to be able to provide investors with shelter from the volatility in the markets.

Related Articles:

Idea of the Week: Afraid Of Investing In Europe? [11 May 12]
Idea of the Week: Why It Pays To Stay The Course [07 Oct 2011]
Idea Of The Week: Emotions Hinder Good Decision Making [30 Sep 2011]
Idea Of The Week: Avoiding Two Risky “Safe Havens” [25 Aug 2011]
Idea Of The Week: 3 Tips For Investing In Volatile Markets [17 Jun 2011]