Fixed Income  
High Yield Bonds Became A Quiet Haven for Investors October 15, 2018
For fixed income investors, 2018 has been a bit of rocky road. Similar with global equities, the fixed income landscape has had its share of difficulties. Overall bond market performance during the third quarter was mixed.
Author : Sherman Tam Cheng Wei


 High Yield Bonds Became A Quiet Haven for Investors

Market Performance in 3Q 2018

For fixed income investors, 2018 has been a bit of rocky road. Similar with global equities, the fixed income landscape has had its share of difficulties. Overall bond market performance during the third quarter was mixed. In terms of total return, only Global bonds posted negative returns of -0.51% while other two major bond segment – Asian and EM bonds were in positive territory with a gain of 1.92% and 1.08% (in USD term) respectively.

In this quarterly update, we take a look at some of the fixed income funds on our platform that managed to shine as well as some of the laggards for the third quarter of 2018.

Figure 1: YTM On Various Bond Segments

Overall Fund Returns in 1H 2018

As of end September 2018. There are total 100 fixed income funds listed on our platform, with 99 of them with full quarterly return in 3Q2018. Over the third quarter of 2018, about 97% of the fixed income funds delivered positive return. Among those funds that recorded positive returns, Affin Hwang World Series – US Short Duration High Income Fund – MYR emerged as the best performer, clocking a return of 6.1% over the quarter. On average, these fixed income funds clocked a 2.0% return over 3Q2018.

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

Top Performing Fixed Income Funds

Table 1: Top 10 Performing Fixed Income Funds

Ranking
Fund Name
Category
3Q18 return (%)
YTD Return (%)
1 Affin Hwang World Series - US Short Duration High Income Fund - MYR
US-High Yield
6.1
5.2
2 RHB USD High Yield Bond Fund - USD
US-High Yield
4.5
3.6
3 RHB Asian High Yield Fund - USD
Asia ex Japan-High Yield
4.5
-1.0
4 RHB Emerging Markets Bond Fund
Emerging Markets-General
4.0
-3.9
5 Eastspring Investments Asian High Yield Bond MY Fund - USD
Asia ex Japan-High Yield
4.0
-1.8
6 CIMB-Principal Preferred Securities Fund - MYR
Global-General
3.8
-0.1
7 Affin Hwang World Series - US Short Duration High Income Fund - USD
US-High Yield
3.8
3.3
8 CIMB-Principal Preferred Securities Fund - USD
Global-General
3.8
-0.5
9 Affin Hwang World Series - US Short Duration High Income Fund - SGD Hedged
US-High Yield
3.8
0.4
10 CIMB-Principal PRS Plus Conservative - Class C
Malaysia-Equity Exposed
3.4
3.8

Source: Bloomberg, iFAST Compilations. Data as of 30 September 2018. Returns in MYR terms with any income or distribution reinvested.

US High Yield Bonds Playing an Unusual Role

Within the top performing funds, 40% of the best performing funds come from the US high yield bond segment (see Table 1) as a strong domestic economy has boosted sentiment and returns of non-investment grade bonds.

This segment has managed to evade the turmoil that has ravaged emerging and even higher quality US investment grade bonds as well as US Treasuries. Within US space, company earnings have been bolstered dramatically by last December’s tax cut by Trump. These tax cuts have lifted corporate earnings, improving the ability of those highly leveraged companies to handle the bulky debt loads on their balance sheets. At present, default rate expectations for high yield segment are low by historical standards.

Besides that, Federal Reserve’s gradual pace of interest rate increases has in effect softened the impact of rate increases and borrowing costs on high yield issuers. Given the strong economic data the outlook will further encourage corporate to continue cutting down debt loads, which is a boon for high yield investors.

USD Exposed Funds Made A Comeback – Thanks to the Mighty US Dollar

Over the third quarter of 2018, an appreciation of the US dollar against the MYR (+2.45%) has also helped drive the positive performance of funds with a US dollar perspective on our top performing funds list. RHB Emerging Markets Bond Fund and CIMB-Principal Preferred Securities Fund – Class MYR where its holdings were denominated in US dollar enjoyed gains of 4.0% and 3.8% respectively during the previous quarter.

Although we believe that the Ringgit is likely stabilised at the current level, investors should bear in mind that the main role of bond funds is to stabilise their portfolios, hence, we would like advocate investors to minimise the foreign currency exposure for their bond portfolio.

Bottom Performing Fixed Income Funds

Table 2: Bottom 10 Performing Fixed Income Funds

Ranking
Fund Name
Category
3Q18 return (%)
YTD return (%)
90 Amundi Bond Global Emerging Blended Fund - MYR Class
Emerging Markets-General
0.6
-4.3
91 KAF Bond Fund
Malaysia-General
0.5
2.3
92 AMB LifeStyle Trust Fund Today
Malaysia-Equity Exposed
0.5
1.7
93 Affin Hwang World Series - Global Income Fund - MYR Hedged
Global-General
0.4
-0.4
94 AmConservative
Malaysia-Equity Exposed
0.4
-1.4
95 United Income Plus Fund
Asia Pacific ex Japan-Equity Exposed
0.0
-0.1
96 Manulife SGD Income Fund - MYR Class
Asia-General
0.0
0.0
97 Eastspring Investments Global Target Income Fund
Global-General
-0.1
-2.6
98 Templeton Global Total Return - MYR
Global-General
-0.1
-3.8
99 Manulife SGD Income Fund - CNH Hedged Class
Asia-General
-0.8
0.0

Source: Source: Bloomberg, iFAST Compilations. Data as of 30 September 2018. Returns in MYR terms with any income or distribution reinvested.

Rising US Treasury Yields Cloud Attractiveness of Investment-Grade Bonds

Despite rising economic uncertainty due to geopolitical and trade tensions, investment grade bonds have emerged as one of the underperforming segments in the previous quarter other than emerging market bonds. Although investment grade bonds typically deliver higher returns relative to the riskier higher yield bonds during period of uncertainty and volatility, the strengthening US economy and rising interest rates in the US have impacted the pricing for lower yield investment grade bonds.

Over the previous quarter, funds with significant exposure to investment grade bond segment such as Eastspring Investment Global Target Income Fund, Templeton Global Total Return – MYR as well as Manulife SGD Income Fund suffered a drop of -0.1% respectively.

Our Advice

By far and large, we have seen how currency fluctuation can boost investors’ fixed income returns when the tide is in their favour. Yet, when times are favourable, it is important not to lose sigh of the possibility of the rainy days ahead as foreign exchange (FX) exposure could work against investors when they least expect it.

As rising interest rate will continue to dominate the theme for fixed income investment, we continue to advocate investors to adopt a systemic portfolio approach, which is to build a diversified portfolio with the combination of equity and bond. At Fundsupermart, we believe that fixed income takes on the role of a portfolio stabilizer, helping to smoothen and reduce volatility.


This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus, product highlight sheet (PHS), and if necessary, consulting with financial or other professional advisers. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Amongst others, investors should consider the fees and charges involved. The relevant prospectuses have been registered and lodged with the Securities Commission. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV. Where a unit split is declared, investors should be highlighted of the fact that the value of their investment will remain unchanged after the distribution of the additional units. All applications for unit trusts must be made on the application form accompanying the prospectus. The prospectuses and PHS can be obtained from Fundsupermart.com. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.