Fixed Income  
Rising Bond Yields and Strengthening Ringgit Hit Foreign Bond Funds April 12, 2018
Over the first quarter of 2018, we saw a broad-based rise in yields across the global bond market with the Asian and EM bond market posting the highest spike in yield.
Author : Jerry Lee Chee Yeong


 Rising Bond Yields and Strengthening Ringgit Hit Foreign Bond Funds

Market Performance in 1Q 2018

Over the first quarter of 2018, we saw a broad-based rise in yields across the global bond market with the Asian and EM bond market posting the highest spike in yield of more than 50 bps. From the total return perspective, only the global bond market as represented by JP Morgan Global Agg Bond Index delivered positive return of 0.95% (in USD term) while its Emerging and Asian counterparts as represented by JP Morgan EMBI Global Total Return Index and Credit Suisse Asian Bond Corporate Total Return posted negative returns of -1.79% and -0.93% (in USD term) respectively.

Figure 1: YTM on Various Bond Segments

To make the matter worse, as the Ringgit Malaysia strengthened more than 4.5% against USD over the last 3 months, the Global, Asian as well as EM bond market tumbled by -3.97%, -4.57% and -5.01% respectively in Ringgit term.

Overall fund returns in 1Q 2018

As of end March 2018, there are total 95 bond funds on our platform with all funds having full quarter returns in 1Q2018. Over the quarter, more than 50% of the bond funds delivered negative returns while about 47% of them posted positive returns. Among those funds that recorded positive returns, none of them achieved return of more than 2.5%. On average, the fixed income funds delivered rather disappointing performance (-1.4%) over the first quarter of 2018.

[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
1Q 2018 return (%)
1 United Income Plus Fund
Asia Pacific excluding Japan-Equity Exposed
1.4
2 CIMB-Principal PRS Plus Conservative - Class A
Malaysia-Equity Exposed
1.2
3 CIMB-Principal PRS Plus Conservative - Class C
Malaysia-Equity Exposed
1.2
4 RHB Bond Fund
Malaysia-General
1.1
5 AmBond
Malaysia-General
1.1
6 RHB Income Fund 2
Malaysia-Foreign Exposed
1.1
7 AmDynamic Bond
Malaysia-Foreign Exposed
1.1
8 Eastspring Investments Global Target Income Fund
Global-General
1.1
9 RHB Islamic Bond Fund
Malaysia-General
1.1
10 AmPRS - Dynamic Sukuk Fund - Class D
Global-General
1.1

Source: Bloomberg, iFAST Compilations. Data as of 31 March 2018. Returns in MYR terms with any income or distribution reinvested.

Local Bond Funds Stood Out From Their Peers

In late January this year, the local central bank, Bank Negara Malaysia (BNM), lifted the benchmark interest rate (OPR) by 25bps for the first time in three-and-a-half year. However, we do not see any significant move in bond yield where the MGS yield stay rather flat after the OPR hike. Reason being, the market participants has priced in the rate hike to a large extend following the rate hike signal given by the central bank in November last year. On top of that, this can also be explained by the increasing inflow into the MGS space where foreign investors are confident that the upside from currency factor is likely to outpace the downside of interest rate hike.

Despite the recent rate hike announcement, the local bond funds denominated the top performing fund list as the foreign bond (EM, Asian and HY bond) saw a larger yield spike and the strengthening of Ringgit has further eaten into the returns of the foreign bond funds. In fact, given some of the foreign exposed bond fund such as United Income Plus Fund, RHB Income Fund 2, AmDynamic Bond and AmPRS - Dynamic Sukuk Fund - Class D have minimum foreign bond exposure, hence the impact from currency and yield spike was relatively lower.

The Only Surviving Global Bond Fund

Eastspring Investments Global Target Income Fund has successfully made into the top performing bond fund list for 4 consecutive quarters. The fund adopts a “risk mitigation” approach towards currencies, which is to hedge the non-MYR exposure in order to reduce the volatility as a result of currency fluctuations. Hence, the fund has minimised the impact of strengthening Ringgit over the last quarter.

On the expectation of rising interest rate, the fund is positioned in the credit segment with a focus on higher-yielding and short duration bonds with the current average YTM and duration standing at about 5.3% and 3.6 years respectively. On top of that, the fund manager is currently taking an overweight position in the subordinated bonds of well-capitalised global financial institutions which provide a higher level of income returns.

Bottom Performing Equity Funds

Table 2: Bottom 10 Performing Fixed Income Funds

Ranking
Fund Name
Category
1Q 2018 return (%)
86 CIMB-Principal Preferred Securities Fund - MYR
Global-General
-6.2
87 Eastspring Investments Asian High Yield Bond MY Fund - USD
Asia excluding Japan-High Yield
-6.3
88 Affin Hwang World Series - US Short Duration High Income Fund - AUD Hedged
US -High Yield
-6.5
89 RHB Emerging Markets Bond Fund
Emerging Markets-General
-6.5
90 CIMB-Principal Preferred Securities Fund - USD
Global-General
-6.7
91 Affin Hwang World Series - Global Income Fund - AUD Hedged
Global-General
-6.8
92 Affin Hwang Select AUD Income Fund - AUD
Australia-General
-6.8
93 RHB Asian High Yield Fund - AUD
Asia excluding Japan-High Yield
-7.0
94 Affin Hwang Select AUD Income Fund - MYR
Australia-General
-7.9
95 Eastspring Investments Asian High Yield Bond MY Fund - AUD Hedged
Asia excluding Japan-High Yield
-7.9

Source: Bloomberg, iFAST Compilations. Data as of 31 March 2018. Returns in MYR terms with any income or distribution reinvested.

Ringgit Continues to Shine

Again, Ringgit was the top performing currency in ASEAN and the second best performing currency in Asian after Japanese Yen, strengthening against US Dollar for more than 4.5% over the first quarter of 2018. As such, the bottom performing fund list was dominated by the foreign bond funds.

At this juncture, although we believe that the Ringgit is likely stabilise 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.

Australian Dollar Knocked Lower

Over the first quarter of 2018, the Australian Dollar was badly punished, having depreciated by more than 1.5% and 6.3% against USD and Ringgit Malaysia respectively.

There are several factors that contributed to the weak Aussie such as the rather disappointing economic data (wage growth and inflation) that led to the dovish Reserve Bank of Australia and some other external factors like the escalating US-China trade war tension as well as the recent slowdown in China business activity (China is Australia’s largest trading partner).

Hence, given the weak Aussie, there are 6 out of the 10 bottom-performing fixed income funds are denominated in Australian Dollar.

Conclusion:

Given the expectation of rising volatility in the global equity market, we would like to encourage investors to adopt a systematic portfolio approach, which is to build a diversified portfolio with the combination of bond and equity bond. Reason being, given the stock-bond correlation, bond fund still plays a very important role as the portfolio stabiliser.

On the global context, since we are expecting for at least another two more hikes from the FED, investors might want to reduce their exposure to the longer-duration developed sovereign debt that is the most susceptible to rising interest rate environment.

Back to local front, after the recent OPR hike in January, we expect the Bank Negara Malaysia (BNM) to keep the OPR unchanged at 3.25% this year. Having said that, investors can consider the 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.


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