Fixed Income  
2016 Top and Bottom Fixed Income Funds: A Prosperous Year for Bonds January 12, 2017
2016 Top and Bottom Fixed Income Funds: A Prosperous Year for Bonds
Author : iFAST Research Team


 2016 Top and Bottom Fixed Income Funds: A Prosperous Year for Bonds

Market Performance in 2016

In the last quarter of 2016, returns delivered by the Global bond segment represented by JP Morgan Aggregate Bond Index, recorded a 1.5 return. Meanwhile, Asian bonds (Credit Suisse Asian Corporate Total Return Index), achieved a 6.8% positive return while EM bond segments, as represented by JP Morgan EMBI Global Total Return Index gained 4.1%. The main contributing factor to all the 3 bond segments is the translation gain from USD to MYR. However, if we observe the returns in USD term, the three segments highlighted a negative return of -6.6%, -1.8% and -4.2% respectively. This can be considered as the aftermath of Trump’s presidency at 8th November 2016 and rate hike from Federal Reserve. Trump’s victory had convulsed the global financial market due to his proposed aggressive fiscal stimulus plans during the election campaign and the market expectation of elevated borrowing rate and higher inflation.

In fact, on a full year basis, 2016 was a marvellous year for the bond segment. This can be noticed from the return from the Global and Asian segments with returns of 6.5% and 10.3% respectively. Meanwhile, EM bond segment was the best performer with a mouth-watering return of 14.8%. Once again, the main driver of the high return from bond segments was due to the weak performance of MYR as it depreciated 4.3% against USD in 2016. Besides, during first half of 2016, a steady decline in treasury yield and Federal Reserve’s decision to remain on hold for rate hike contributed to the good performance of bond segments. However, the story turned around in the second half after the Trump’s presidential victory which led to a sharp increase in yield due to the market expectation of the Trump’s aggressive planed policy might create considerable uncertainty to the economy. In fact, improving economic data such as the fall in unemployment rate to lowest since 2007 prompted FED to increase its key interest rate in December 2016. These are the main factors that drove down the return of bond segments second half of 2016. Fortunately, translation gain from USD to MYR able to recover the losses trigger by these negative factors to the bond segments.

Overall Fund Returns in 2016

In 2016, there are 71 bond funds listed on our platform, while only 25 of the funds generated positive returns for last quarter of 2016. However, on full year basis, 63 funds had full year return and all recorded positive returns for the year of 2016.

[All stated returns are total returns including dividends and in MYR terms unless otherwise stated]

Chart 1: 2016 return distribution for fixed income funds.

Top Performing Fixed Income Funds

Table 1: Top 10 Performing Fixed Income Funds in 2016.

Ranking
Fund Name
Category
4Q16 Return (%)
2016 Return (%)
1 Eastspring Investments Asian High Yield Bond MY Fund - USD
Asia excluding Japan-High Yield
7.9
14.7
2 Eastspring Investments Asian High Yield Bond MY Fund - AUD Hedged
Asia excluding Japan-High Yield
1.8
14.3
3 United Asian High Yield Fund - USD
Asia including Japan High Yield
7.4
14.1
4 United Asian High Yield Fund - MYR
Asia including Japan High Yield
7.0
14.0
5 United Asian High Yield Fund - SGD
Asia including Japan High Yield
7.1
13.0
6 Eastspring Investments Asian High Yield Bond MY Fund - MYR Hedged
Asia including Japan High Yield
-0.4
12.0
7 RHB Emerging Markets Bond Fund
Emerging Markets-General
1.3
10.7
8 Templeton Global Total Return - USD
Global-General
18.3
10.0
9 AmTactical Bond - Class B (MYR)
Asia excluding Japan- General
-0.1
8.4
10 AmPRS - Tactical Bond Fund - Class D
Asia excluding Japan- General
-0.2
8.0

Source: Bloomberg, iFAST compilations. Data as of 30 December 2016. Returns in MYR terms and dividend reinvested.

Handsome Rewards From a Risky Ride

This year, the riskier segments such as Asian high yield and EM debt continue to conquer in terms of performance. Referring to chart 2, in the first Quarter of 2016, the Asia high yield segment offered investors with an attractive yield as high as 8.3%. In fact, due the continued low interest rate environment, the high yield segment became the favourite for the yield-hunting investors. Subsequently, we observed substantial depression in yield after the first quarter which resulted in double digit of returns for high yield segment.

In the last quarter of 2016, the market sentiment turned after Trump’s presidential victory and the rate hike decision by Federal Reserve (Fed), which triggered a spike in yield leading to a relatively bad performance of bond segment. However, translation gains due to the steep depreciation of MYR had substantially contributed to the return for last quarter of 2016. Some of the top performing funds such as Eastspring Investments Asian High Yield Bond MY Fund – USD, United Asian High Yield Fund – USD and Templeton Global Total Return – USD achieved good returns in last quarter of 2016.

With the limited downside of Ringgit movement and potential uncertainty with the Fed monetary policy, we have decided to underweight the riskier segments such as Asian high yield segment.

Chart 2: Yields depression for different bond segments.
Chart 3: YTMS on various bond segments.

Bottom Performing Fixed Income Funds

Table 3: Bottom 10 Performing Fixed Income Funds in 2016.

Ranking
Fund Name
Category
4Q16 Return (%)
2016 Return (%)
54 Pheim Income Fund
Malaysia-Equity Exposed
0.9
2.5
55 Manulife Bond Plus Fund
Malaysia-Foreign Exposed
-1.3
2.5
56 Manulife Shariah PRS - Conservative Fund - Class A
Malaysia-Equity Exposed
-2.0
1.7
57 CIMB Islamic Enhanced Sukuk Fund
Malaysia-Equity Exposed
-0.9
1.7
58 AmPRS - Conservative Fund - Class D
Malaysia-Equity Exposed
-0.5
1.6
59 RHB Retirement Series - Conservative Fund
Malaysia-Equity Exposed
-1.1
1.5
60 RHB GoldenLife Today
Malaysia-Equity Exposed
-1.2
1.4
61 Eastspring Investments Dana Al-Islah
Malaysia-Equity Exposed
-0.4
1.4
62 CIMB Islamic PRS Plus Conservative - Class C
Malaysia-Equity Exposed
-1.2
0.7
63 United Income Plus Fund
Asia excluding Japan-Equity Exposed
-2.9
0.5

Source: Bloomberg, iFAST compilations. Data as of 30 December 2016. Returns in MYR terms and dividend reinvested.

Fixed Income Funds Weighed Down by Malaysia Equities

Investors need to be cautious when investing into bond funds that have exposure to equities as 90% of the bottom performing funds are equity-exposed funds. Despite the opportunity of earning higher return by including certain percentage of equites, investors should also be mindful that higher returns are associated with higher risk. The total return for FBMKLCI in 2016 is a paltry 0.06% and Malaysian equities-exposed fixed income funds would be dragged down by the lacklustre performance of Malaysia equities.

Conclusion

Despite the poor returns from equity-exposed fixed income funds owing to the sluggish equity performance, in general, investors in Malaysia enjoyed lucrative returns from fixed income investments due to depreciating MYR.

From Chart 2, we noticed the yield across all segments spike up in the last quarter of 2016. However, the valuation for bonds are still relatively expensive with the market consensus of expecting more rate hikes by Fed. We advocate investors to stay short on duration as Fed’s rate hike may cause upwards pressure in yields in every bond segments.

In our Key Investment Themes and 2017 Outlook, we have decided to shift our asset allocation view to underweight bonds vis-à-vis equities in 2017. Although we are less optimistic on the fixed income segment, it is still playing a significant role in every investor’s portfolio for diversification purpose. Last but not least, we would like to remind investors who chase the FX returns from foreign bonds to be cautious of possible FX losses should MYR rebound from the current level.


 

 


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