Fixed Income  
Malaysia-Equity Exposed Fixed Income Funds Made The Come Back January 17, 2018
Over the last quarter of 2017, the Global bond market as represented by JP Morgan Global Aggregate Bond Index outperformed its EM and Asian counterparts, registering 1.3% return in USD term for 3 months ended 31 December 2017. However, from the Ringgit perspective, all the three major bond segments – Global, Asian and EM bonds, posted negative returns of -2.8%, -3.5% and -3.6% in the last quarter of 2017.
Author : Jerry Lee Chee Yeong


 Top and Bottom Fixed Income Funds 2017: Malaysia-Equity Exposed Fixed Income Funds Made The Come Back

Market Performance in 2017

Over the last quarter of 2017, the Global bond market as represented by JP Morgan Global Aggregate Bond Index outperformed its EM and Asian counterparts, registering 1.3% return in USD term for 3 months ended 31 December 2017. However, from the Ringgit perspective, all the three major bond segments – Global, Asian and EM bonds, posted negative returns of -2.8%, -3.5% and -3.6% in the last quarter of 2017.

On a full year basis, unlike in 2016 – a marvelous year for bond segment, 2017 wasn’t a good year for bond investors as we saw the EM bond market drop by -1.7%, followed by Global bond and Asian bond market which returned -3.1% and -5.4% respectively. The poor performance of the various bond segments was a result of the strong Ringgit as the Ringgit has strengthened against USD by more than 10% in 2017. However, the Global bond market delivered rather respectable return in USD term (+7.0%), despite the tightening monetary condition in US and ECB’s decision to reduce its monthly quantitative easing purchase. In emerging market, the disinflation environment provides the central banks with rooms for interest rate cuts, particularly in Indonesia (-50 bps), Russia (-175bps) and Brazil (-625bps) resulting in the outperformance of EM bond segment (9.2% in USD term) against its Global and Asian (5.0% in USD term) counterparts.

Overall Fund Returns in 2017

As of end-December 2017, there are 95 bond funds listed on our platform, with 67 of them delivering positive return over the last quarter of 2017. However, on full year basis, 79 funds had full year return and only 15 of them (19%) registered negative returns.

[All stated returns are total returns inclusive of any income or distribution reinvested and are in MYR terms unless otherwise stated]

Figure 1: 2017 Returns Distributions For Bond Funds

Top Performing Fixed Income Funds

Table 1: Top 10 Performing Fixed Income Funds

Ranking
Fund Name
Category
2017 return (%)
4Q 2017 Return (%)
1 Eastspring Investments Global Target Income Fund
Global-General
10.6
1.6
2 Maybank Financial Institutions Income Asia Fund
Asia including Japan-Financials
7.7
0.3
3 Kenanga OnePRS Conservative Fund
Malaysia-Equity Exposed
7.2
1.6
4 Affin Hwang World Series - Global Income Fund - MYR Hedged
Asia Global-General
7.1
0.8
5 AmConservative
Malaysia-Equity Exposed
7.1
1.1
6 RHB Asian High Yield Fund - MYR
Asia excluding Japan-High Yield
7.0
1.0
7 AIA PAM - Conservative Fund
Malaysia-Equity Exposed
6.4
1.2
8 AmPRS - Islamic Fixed Income Fund - Class D
Malaysia-Foreign Exposed
6.3
1.8
9 Eastspring Investments Dana Al-Islah
Malaysia-Equity Exposed
6.1
2.6
10 CIMB Islamic Enhanced Sukuk Fund
Malaysia-Equity Exposed
6.1
1.8

Source: Bloomberg, iFAST Compilations. Data as of 31 December 2017. Returns in MYR terms with any income or distribution reinvested.

Malaysia-Equity Exposed Funds Ended The Year With Decent Performance

Malaysia equity market as represented by FBMKLCI Index ended the three consecutive years of negative price return, rising approximately 9.5% in 2017. The recovering corporates earnings, improving economic fundamental together with the strong foreign interest were the main drivers for the outstanding performance of Malaysia’s stock market. In fact, after 3 years of net foreign outflow, Malaysia equity market saw foreign investors as net buyer in 2017, with the net purchase amounting more than RM 10 billion. Hence, given the rather robust performance from the local equity market, we saw 6 out of 10 top performing fixed income funds were the local fixed income funds with equity exposure.

The Only Few Surviving Foreign Bond Funds

Last year, on full year basis, there were two Global and two Asian fixed income funds which made it into the top 10 best performing funds on our platform despite the strengthening of the Ringgit. Reason being, all the four foreign exposed funds consistently hedged their foreign currency exposures back to Ringgit, hence minimizing the currency translation loss over the same period.

Particularly for Eastspring Investment Global Target Income Fund, the double digit return from the fund was attributed primarily to the good credit selection especially on the Indonesia corporate bonds. Last year was the first time that Indonesia’s sovereign bonds are rated investment grade by all the three major credit ratings agencies – Moody’s, Standard & Poor Ratings (S&P) and Fitch, since Asian financial crisis. Hence, the sovereign upgrades coupled with the rate cut by the Bank Indonesia boded well for the Indonesia’s corporate bond market with the average yield compressing to 4-year low.

Figure 2: Indonesia's corporate bond yield

Bottom Performing Equity Funds

Table 2: Bottom 10 Performing Fixed Income Funds

Ranking
Fund Name
Category
2017 return (%)
4Q 2017 return (%)
70 United Asian High Yield Fund - USD
Asia including Japan-High Yield
-3.5
-3.6
71 RHB USD High Yield Bond Fund - USD
US -High Yield
-3.6
-3.4
72 United Asian High Yield Fund - MYR
Asia including Japan-High Yield
-4.0
-3.9
73 Affin Hwang World Series - Global Income Fund - USD
Global-General
-4.1
-3.4
74 RHB Asian High Yield Fund - USD
Asia excluding Japan-High Yield
-4.5
-3.5
75 RHB Asian Total Return Fund
Asia including Japan-General
-5.0
-3.8
76 Eastspring Investments Asian High Yield Bond MY Fund - USD
Asia excluding Japan-High Yield
-5.4
-3.5
77 Affin Hwang AIIMAN Global Sukuk Fund - USD
Global-General
-6.1
-3.9
78 Templeton Global Total Return - USD
Global-General
-6.7
-5.7
79 Affin Hwang AIIMAN Global Sukuk Fund - MYR
Global-General
-8.4
-4.1

Source: Source: Bloomberg, iFAST Compilations. Data as of 31 December 2017. Returns in MYR terms with any income or distribution reinvested.

Unhedged Foreign Currency Exposure – Double Edge Sword

One common feature of the bottom performing funds is that most of them are exposed to the foreign currency exposure especially the US Dollar. Early last year, we have reminded our investors that a fund with the unhedged foreign currency exposure is a double edge sword, hence investors should be cautious and do not chase the FX returns as we think that there is limited downside for Ringgit.

After being one the worse performing currencies over the last 2 years, Ringgit rebounded about 10.8% against US Dollar in 2017, emerging as the best performing currency in ASEAN and the second best performing currency in Asia. As such, one can observe that the foreign bond funds with unhedged foreign currency exposure topped the bottom performing funds list in 2017.

Since the main role of bonds funds is to stabilize investors’ portfolios and given the current market condition coupled with several factors that are pointing to increasing positives for the Ringgit, we would like to advocate investors to avoid taking too much currency risk.

Figure 3: Respective currencies’ performance against USD in 2017

Conclusion:

After stepping into 2018, as we expect more central banks to move towards normalization of monetary policy by abandoning their asset purchase programs and shift towards raising their interest rates away from their historical lows, short duration bond is likely to outperform the long-tenure bond.

Similarly, on domestic front, as we see increasing possibility of an OPR hike this year by the local central bank, Bank Negara Malaysia, amid their bullish stance on Malaysia economic prospect, investors can consider the local short duration bond funds, which are less susceptible to the rising interest rate.


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