- Short duration portfolio comprising of short-term bonds and money market instruments
- Seeks to outperform 3-month Singapore Interbank Offered Rate (SIBOR)
- Long-term track record with 10-year annualised return of 2.3%
- AUD-hedged share class offers enhanced return; fund's underlying yield boosted by interest rate differential of apporximately 3.4%
- Designated Parking Facility Fund status on both SGD and AUD-hedged classes provides transactional convenience
- Suitable for investors who are seeking slightly higher returns that bank deposits but are unwilling to take on too much risk
After covering the higher-risk segment of the fixed income universe, we take a trip down the risk thermometer to highlight one of the safest bond funds on board - the Nikko AM Shenton Short Term Bond Fund.
+ Lower Risk Portfolio Without Compromised Returns
With a risk rating of 1, the Nikko AM Shenton Short Term Bond Fund (known as the Nikko AM Shenton ShortTerm Bond on fundsupermart.com and WISE@fundsupermart.com) is one of the safest bond funds available to investors. The fund’s investment mandate specifies that the portfolio may only hold short-term bonds and money market instruments. Its short duration portfolio minimises interest rate risks undertaken by the fund, while still seeking to attain returns higher than the prevailing 3-month Singapore Interbank Offered Rate (SIBOR) which is the fund’s stated benchmark.
The SGD share class of the Nikko AM Shenton Short Term Bond Fund was launched in September 2000, giving it more than 10 years of track record. We present the fund’s 10-year performance history in Chart 1.
Chart 1: 10-Year Performance History of Nikko AM Shenton Short Term Bond Fund
As evident from Chart 1, the fund experienced a sharp decline in NAV in September 2008. Over the period of slightly less than two months, the fund’s NAV declined 4.1% (from 1.21103 on 10 September 2008 to 1.16106 on 31 October 2008). This loss in value may be partially attributed to the bankruptcy filing of Lehman Brothers Holdings Inc on 15 September 2008. The fund had approximately 2% of its portfolio allocated to Lehman securities, resulting in an overall loss of 1.26% of NAV as a direct result of this credit event. Despite the rather heavy losses suffered, the fund managed to make up its losses in less than a year; the fund’s NAV had climbed steadily to 1.21107 by 22 October 2009.
In the manager’s defence, Lehman was rated A and A2 by S&P and Moody’s respectively on 12 September 2008, representing investment-grade quality that was assumed to have very low probabilities of default. While this incident reinforces the point that all forms of investments carry an element of risk, it also highlights the importance of diversification and how a well diversified portfolio helps mitigate losses even when faced with a black swan event like this. As observed, a unit trust structure automatically allows investors to enjoy diversification benefits regardless of their investment amount. While a direct investor into Lehman securities would have experienced a 100% loss of capital, a unit trust investor would face only a percentage decline from the fund.
Even when taking into account this period of volatility for the fund, its long-term track record is impressive. Its 10-year annualised return was 2.3%. More recently, the fund’s 5-year and 3-year annualised returns were 2.0% and 3.3% respectively. Table 1 shows the year-on-year returns of the fund. We note that the only year where the fund experienced a negative return was 2008, due to reasons discussed previously.
|Table 1: Year-on-year returns of Fund
|Source: iFAST compilations, all returns in SGD terms, dividends reinvested, as of 16 August 2012
+ Australian-Dollar Hedge Option – Benefit From Strong AUD Interest Rates
While the Nikko AM Shenton Short Term Bond Fund sits firmly within the realm of “low risk-low and steady returns”, the launch of the AUD-hedged class, Nikko AM Shenton Short Term Bond Fund (A$), of the same fund offers investors the opportunity to gain additional yield from the same strategy. While essentially utilising the same strategy of investing in short-term bonds and money market instruments, the AUD-hedged share class enters into forward currency contracts, meaning the manager will sell SGD and use the proceeds to buy a corresponding amount of AUD.
The forward currency contracts will give the fund exposure to the AUD and its corresponding higher interest rates (a 3-month deposit in AUD gives approximately 3.5% in interest while a comparable deposit in SGD only yields approximately 0.1%). The yield on the AUD-hedged class of the fund will thus be comprise of both yield on the underlying assets as well as the interest rate differential, approximately 3.4% currently, captured by the forward currency contracts. (See Nikko AM Shenton Short Term Bond (A$ Hedged) - With 4.68% Yield for more information)
However, local investors should note that the increased yield will come with currency risks due to the AUD exposure. Should the AUD decline against the SGD, local investors will see gains from the fund eroded by the foreign exchange movement. On the other hand, in the event that the AUD strengthens against the SGD, returns on the fund will be further enhanced. Due to the additional currency risk, the Nikko AM Shenton Short Term Bond Fund (A$) has been accredited a risk rating of 2, one notch above the SGD-class mother fund.
+ Parking Facility Fund
Both the SGD and AUD-hedged classesare designated Parking Facility Funds on the fundsupermart.com platform. This means that investors enjoy transactional convenience when using the fund as a parking facility while waiting for opportune moments to enter their favoured markets.
As a designated Parking Facility Fund, investors who choose to invest into other unit trusts on our platform while using the Parking Facility Fund as the payment method will be able to transact at the day’s price. In addition, investors will be able to invest into other unit trusts by indicating the absolute investment amount instead of calculating the number of units to be invested. For example, an investor can choose to buy Fund A using $10,000 from the Nikko AM Shenton Short Term Bond Fund, instead of having to specify how many units from the fund he wishes to use. When redeeming units from other funds, investors can also choose to have the sales proceeds credited into Nikko AM Shenton Short Term Bond Fund directly. (See Parking Tools for more information)
A WISE Investment
The Nikko AM Shenton Short Term Bond Fund will be suitable for investors who are looking for low risk-low returns instruments that do not compromise on safety nor liquidity. With its long-term track record, the fund has proven to be able to deliver returns that are clearly above the prevailing bank deposit rates through its portfolio of diversified and short duration investments. Its low-risk portfolio will also cater to investors who are unwilling to take on too much risks in their portfolios.
The AUD-hedged class of the fund will appeal to investors who are seeking enhanced returns and are comfortable with the AUD exposure. Particularly, parents who have children studying in Australia or families intending to take a holiday in Australia will be particularly suited to invest in the AUD-hedged class of the fund.
With both classes being designated parking tools on the fundsupermart.com platform, investors who are keen to manage their investments with the least lag time will do well to maintain a lump sum of their holdings within either of these two fund classes.
With the fund’s participation in the WISE@fundsupermart.com programme, investors will be able to participate in the fund’s steady growth at 0% sales charge. In conjunction with the launch of WISE, investors with at least SGD 100,000 worth of investments in any of the WISE fixed income funds will automatically participate in our exciting lucky draw. In addition, investors who need any advice with regards to the Nikko AM Shenton Short Term Bond Fund or their portfolios may read more about the fund in its Fund Review or contact our friendly Client Investment Specialist team at email@example.com.
A Beginner's Guide to Fixed Income Investing
Nikko AM Shenton Short Term Bond Fund Fund Review