Fixed Income  
Malaysia Bond Funds Save The Day July 16, 2018
The first half of 2018 has seen a wobbly financial market as trade concerns continue to dominate the headlines as well as tighter monetary policy and financial conditions, alongside higher inflation, which kept the bond market from making headway out of the range it has been trading since the first quarter this year.
Author : Sherman Tam Cheng Wei


 Malaysia Fixed Income Funds Resilient Throughout Turbulent 1H 18

Market Performance in 1H 2018

The first half of 2018 has seen a wobbly financial market as trade concerns continue to dominate the headlines as well as tighter monetary policy and financial conditions, alongside higher inflation, which kept the bond market from making headway out of the range it has been trading since the first quarter this year.

The negative sentiment was exacerbated when a spike in US treasury yields since mid-April in tandem with the revival of US dollar sparked a foreign capital outflow from Asia and emerging market space. In terms of total return, all the three major bond segments – Global, Asian and EM bonds, posted negative returns of -1.54%, -2.42% and -5.23% (in USD term) respectively.

Figure 1: YTM On Various Bond Segments

Overall Fund Returns in 1H 2018

As of end June 2018, there are total 98 fixed income funds listed on our platform, with 92 of them with full half return in 1H2018. Over the first half of 2018, about 59% of the fixed income funds delivered negative returns while about 41% of them posted positive returns. Among those funds that recorded positive returns, none of them achieved return more than 2.5%. On average, these fixed income funds have clocked a -1.3% loss over 1H2018.

[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
2Q18 return (%)
1H2018 Return (%)
1 AmDynamic Bond
Malaysia-Foreign Exposed
1.2
2.4
2 Nomura i-Income Fund
Malaysia-General
1.0
2.0
3 KAF Bond Fund
Malaysia-General
0.8
1.9
4 AmPRS - Dynamic Sukuk Fund - Class D
Global-General
0.8
1.8
5 Opus Cash Extra Fund
Malaysia-General
0.9
1.8
6 RHB Islamic Bond Fund
Malaysia-General
0.7
1.8
7 AmDynamic Sukuk - Class A
Global-General
0.8
1.8
8 Opus Shariah Cash Extra Fund
Malaysia-General
0.8
1.8
9 Libra AsnitaBond Fund
Malaysia-General
0.7
1.8
10 Ambond
Malaysia-General
0.6
1.7

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

Malaysia Fixed Income Funds Got Spared

In recent months, the inflation rate has stabilised after the announcement of an OPR rate hike by Bank Negara Malaysia (BNM) in its January meeting, with Malaysia bond yields were fairly stable (compared to our Asia or EM peers amid foreign capital outflow) over the 1H 2018, which may suggest diminished expectations for a further hike in the remaining months of this year. With that, this has contributed positively to the Malaysia bond market performance, with the TR BPAM All Bond Index registering a return of 2.7% in 1H 2018.

As local fixed income funds dominate the top performing fund list, foreign bond (Asian, EM & High Yield bond) were negative impacted by a larger yield spike as well as the relatively firmer Ringgit compared with its counterparts over the first 6 months of the year. Some local fixed income funds with minimum foreign bond exposure such as AmDynamic Bond and AmDynamic Sukuk – Class A and AmPRS – Dynamic Sukuk Fund – Class D were spared from the bloodbath seen in Asian & EM bond market.

Bottom Performing Fixed Income Funds

Table 2: Bottom 10 Performing Fixed Income Funds

Ranking
Fund Name
Category
2Q18 return (%)
1H2018 return (%)
83 RHB Asian High Yield Fund - USD
Asia ex Japan-High Yield
0.3
-5.3
84 Eastspring Investments Asian High Yield Bond MY Fund - USD
Asia ex Japan-High Yield
0.8
-5.6
85 Affin Hwang Select AUD Income Fund - AUD
Australia-General
1.3
-5.7
86 Affin Hwang World Series - US Short Duration High Income Fund - AUD Hedged
US-High Yield
0.4
-6.1
87 Affin Hwang Select AUD Income Fund - MYR
Australia-General
1.5
-6.5
88 Affin Hwang World Series - Global Income Fund - AUD Hedged
Global-General
-0.7
-7.5
89 RHB Emerging Markets Bond Fund
Emerging Markets-General
-1.2
-7.6
90 Amundi Bond Global Emerging Blended Fund - SGD Class
Emerging Markets-General
-4.7
-8.7
91 RHB Asian High Yield Fund - AUD
Asia ex Japan-High Yield
-4.2
-10.8
92 Eastspring Investments Asian High Yield Bond MY Fund - AUD Hedged
Asia ex Japan-High Yield
-3.6
-11.3

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

Rout in Asia & Emerging Bonds

Due to heightened risk aversion and weak investors’ sentiment in the first half of 2018, fixed income in the riskier segment such as the Asian bonds and emerging market bonds have been negatively impacted. Higher inflation expectation in US together with the stronger US dollar, escalating tensions between the US and China as well as the formation of a populist coalition government in Italy are making the higher-yielding Asian & EM credit less attractive to foreign investors. Furthermore, given that many Asian/EM countries are trade-dependent, growing tensions over a trade war also drove investors to pull out their capital from these countries. Table 2 showed that 70% of the bottom performing fixed income funds were Asian and EM bond funds.

Australian Dollar Weakness on Poorer Economic Outlook

Turning the limelight to the antipodean, the Australian dollar was the second worst performing currency against our home currency amongst the G10 economies (refer to Figure 2). Market participants are disappointed with the Aussie given that other economies around the world are already well ahead in terms of the cycle of tightening monetary policy. Weak economic growth as well as low inflation are limiting the central bank’s ability to raise interest rates.

In addition, the Australian dollar has also suffered a bumpy ride with the ongoing Sino-US trade disputes. There are concerns that any further escalation in this trade dispute could impact Australia’s iron-ore export market, thus making the Australian dollar less attractive in 1H 2018. Hence, the weakness in Australian dollar has weighed on the performance of the funds with AUD exposure such as Affin Hwang Select AUD Income Fund (-5.7% and -6.5% for AUD & MYR class respectively) (see Table 2).

Figure 2: Australian Dollar Had A Bumpy Ride

Takeaway

After a choppy 6 months into 2018, we are of the view that a higher volatility regime is ahead of us. Our experience tells us that we must be careful not to overreact to market noises, especially when it is caused by factors which are temporary in nature.

In the backdrop of tightening monetary policy, we remind investors to be cautious on the risk of rising interest rates and advise investors to underweight their exposure in longer duration fixed income funds which might be the victim to rising yields.

We have been right in being prudent and maintain a defensive stance on bond markets as a whole while having a positive view towards Malaysia fixed income funds earlier this year. As the local interest rate outlook remains conducive for local bonds and Sukuk investments going forward, investors can consider longer duration funds such as Libra AsnitaBond fund, KAF Bond Fund and RHB Bond Fund to enjoy a higher yield by taking additional duration risk.

To add on, we have wrote a piece of article to highlight the bright future prospect for local fixed income funds and its ability to deliver decent yields for investors moving forward back in March 2018 (read here)!

Just in case you’re shopping for funds, we have made your investment journey easier by laying out the list of Recommended Unit Trust 2018/19 for your reference. Happy investing!


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