Question: Who are the
Answer: When mortgage-backed
securities (MBS) are used in a diversified fixed income strategy, they typically
comprise 25-50% of the portfolio. The Lehman Aggregate Bond Index is a commonly
used US fixed income performance benchmark and MBS currently already comprise
about 45% of this index. So, in a real sense, a benchmark neutral exposure
to MBS is 45% of one’s portfolio! And since US MBS historically have had vastly
higher Sharpe ratios than the other fixed income sectors, there are certainly
other arguments for MBS to be considered as a standalone fixed income opportunity.
Q: Why is the S$ Units
A: As the underlying
fund (Sogelux Bonds - US Mortgage-Backed Securities Fund) which the SGAM Total
Return Bond Fund feeds into is denominated in US$, the S$ Units class would
be subject to fluctuations of the S$/U$ foreign exchange rate. In order to
achieve the fund’s objective of providing consistent return to the investors
over the investment horizon for both classes of Units, the S$ Units class
will be hedged so as to protect the investors from the volatility of the foreign
Q: What are the fees
of the SGAM Total Return Bond Fund?
A: There is a 3%
preliminary charge when investors buy into the fund. In addition, the total
management fee of the fund will be 1% per annum, accrued weekly and chargeable
to the fund on a monthly basis. The management fee is broken down into 0.60%
per annum for the underlying level (which is the Sogelux Bonds - US Mortgage-Backed
Securities Fund) and 0.40% per annum for the feeder level.
Q: Will there be extra
costs involved by investing in a feeder fund structure?
A: No, there will
not be extra layers of management fees involved by investing in a feeder structure.
SG Asset Management has ensured that investors will be paying the same management
fees if they invest into the Singapore fund or if they buy into the retail
tranche of the underlying fund, the Sogelux Bonds - US Mortgage-Backed Securities
Fund. This is made possible as the SGAM Total Return Bond Fund will be investing
into the institutional tranche of the Sogelux MBS Fund which is denominated
in US$. There will not be any subscription fees and redemption charges at
the underlying fund level, except for the management fee which is 0.60% per
Q: Why invest in US
US MBS have attractive returns and relatively low volatility as compared to
other fixed income products. Secondly, MBS have had high Sharpe ratios historically,
which means they have high returns relative to the risk taken, thus making
it an attractive asset class for return enhancement. Thirdly, US MBS have
historically outperformed US Treasuries when interest rates rise and with
the global expectation for a rise in interest rates over the next few years,
expectation for the US MBS market to outperform treasury (US government bonds)
is high. Fourthly, US MBS is the most rapidly growing segment of the US fixed
income market and has become the largest segment of the US fixed income market.
It makes up more than 40% of the Lehman Aggregate Bond Index which is a widely
used broad bond index in the US (as of end September 2002). Generally, the
larger the market sector, the greater the number of product offerings. However,
given the size of the US MBS market, there are surprisingly few specialised
US MBS product offering. Hence the value-add for specialised MBS managers
in creating excess returns for investors.
Q: Who issues US MBS?
A: The majority
of US MBS are issued and/or guaranteed by an agency of the US government -
the Government National Mortgage Association (Ginnie Mae) or by government-sponsored
enterprises (GSEs) such as the Federal National Mortgage Association (Fannie
Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These agencies
buy qualified mortgage loans or guarantee pools of such loans originating
from financial institutions, securitise these loans, and distribute the securities
through the dealer community. They also provide different levels of guarantees
to investors. Some private institutions also package various types of mortgage
loans and pools - "private-label” MBS - in contrast to “agency” MBS.
Q: How safe are US
A: Issuers of US
MBS are typically very selective in choosing the mortgages which make up their
pools. Beyond the basic security of the mortgage-loans themselves, US MBS
issued and/or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac carry additional
guarantees which enhance their creditworthiness. The SGAM Total Return Bond
Fund will mainly invest in high quality US MBS guaranteed by the US government,
its agencies, instrumentalities or its sponsored corporations, and in privately
issued mortgage-backed securities rated Aa or higher by Moody's or AA or higher
by Standard and Poor's.
Q: What are the risks
A: Investment in
US MBS is subject to credit risk where some issuers may be unable to meet
their financial obligations, such as the payment of principal and/or interest
on an instrument, or go bankrupt. Furthermore, an issuer may suffer adverse
changes in its financial condition that could lower the credit quality of
a security, leading to greater volatility in the price of the security and
in the value of US MBS. A change in the quality rating of a bond or other
security can also affect the security's liquidity and make it more difficult
Investment in mortgage-backed
securities which are not guaranteed by the US government, which may make investors
subject to certain credit risks. This is especially true during periods of
economic uncertainty or during economic downturns.
Investment in US MBS
may be subjected to interest rate risks where the value of the mortgage-backed
securities may fall as fixed income securities generally fall in value when
interest rates rise. The longer the term of a fixed income instrument, the
more sensitive it will be to fluctuations in value from interest rate changes.
Changes in interest rates may have a significant effect on US MBS, especially
securities with a long term to maturity and mortgage-backed securities, including
collateralised mortgage obligations, and stripped mortgage securities. Such
holdings of mortgage-backed securities can reduce returns if the owners of
the underlying mortgages pay off their mortgages sooner than anticipated when
interest rates go down. With investments in mortgage-backed securities, it
may be subject to extension risk and prepayment risk, which are both a type
of interest rate risk.
"Extension risk" refers
to the possibility that rising interest rates may cause owners of the underlying
mortgages to pay off their mortgages at a slower than expected rate. This
particular risk may effectively change a security which was considered short
or intermediate term into a long-term security. Long-term securities generally
drop in value more dramatically in response to rising interest rates than
short or intermediate-term securities.
"Prepayment risk" refers
to the possibility that falling interest rates may cause owners of the underlying
mortgages to pay off their mortgages at a faster than expected rate. This
tends to reduce returns since the prepayment will have to be reinvested at
the then lower prevailing rates.
Investment in US MBS
is also subject to liquidity risk with the possibility that the investors
may lose money or be prevented from earning capital gains if the mortgage-backed
security cannot be sold at the time and price that is most beneficial to the
investors. Because mortgage-backed securities may be less liquid than other
securities, investment in US MBS may be more susceptible to liquidity risks
than funds that invest in other securities.
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on the SGAM Total Return Bond Fund, click here.
To read more about
the fund, click here.
The prospectus for the
SGAM Total Return Bond Fund (the "Fund") is available and may be obtained, subject
to availability from the distributors. Investors should read the prospectus
before deciding whether to subscribe for or purchase units in the Fund ("Units").
The value of the Units and the income accruing to the Units may fall or rise.
The past performance and/or any forecast is not necessarily indicative of the
future or likely performance of the Fund or SGY Asset Management (Singapore)
Limited (the "Manager").Units are not bank obligations of, or guaranteed or
insured by the Manager, or any subsidiaries or associated companies of the Manager
or by the distributors or any of their affiliates or subsidiaries. An investment
in Units is subject to investment risks, including the possible loss of the
principal amount invested, Units are not available to US persons.