Fixed Income  
Top and Bottom Fixed Income Funds 1H2017: Malaysia-Equity Exposed Fixed Income Funds Dominance July 13, 2017
In this article, we will be looking into some of the contributing factors to the top and bottom performing fixed income funds over 1H2017
Author : Jerry Lee Chee Yeong


 Top and Bottom Fixed Income Funds 1H2017: Malaysia-Equity Exposed Fixed Income Funds Dominance

Market Performance in 1H 2017

Over the first half of 2017, the improving global economy outlook coupled with the still accommodative monetary policy provided a healthy backdrop for bonds market. Within the bond segment, the demand for risky assets remained strong where bond yields across most of the bond segments continued to decline, with emerging market debt markets experiencing the greatest fall in yield (48 basis points) year-to-date as of 30th June 2017 (see figure 1). However, as Ringgit turns out as the strongest currency among its Asian peers, the global fixed income markets posted mixed return for the first half of 2017, with global bond segment represented by JP Morgan Aggregate Bond Index and Asian bonds (Credit Suisse Asian Corporate Total Return Index) edging down by -0.4% and -1.8% respectively. On the other hand, EM bond segments, as represented by JP Morgan EMBI Global Total Return Index soared by 1.1% over the same period.

Chart 1: YTM on Various Bond Segments

Overall Fund Returns in 1H 2017

As of end-June 2017, there are 81 bond funds on our platform, with 77 funds having a full semi-annual return for 1H17. Out of the 77 funds, 66 of them posted positive returns. On average, FSM All Bond Index (all fixed income funds listed on Fundsupermart’s platform) delivered a positive return of 2.1%, while the FSMI Malaysia Bond Index, which measures the average performance of Malaysian fixed income funds inched up by 2.6%.

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

Chart 2: 1H2017 Return Distributions for Fixed Income Funds

Top Performing Equity Funds

Table 1: Top 10 Performing Equity Funds

Ranking
Fund Name
Category
1H17 return (%)
2Q17 Return (%)
1 AmPRS - Conservative Fund - Class D
Malaysia-Equity Exposed
6.9
4.0
2 AmConservative
Malaysia-Equity Exposed
6.7
1.4
3 Affin Hwang World Series - Global Income Fund - AUD Hedged Class
Global-General
6.1
-1.2
4 RHB GoldenLife Today
Malaysia-Equity Exposed
5.6
1.2
5 RHB Asian High Yield Fund - AUD
Asia excluding Japan-High Yield
5.6
-2.3
6 Affin Hwang Select AUD Income Fund - AUD
Australia-General
5.3
-1.7
7 Affin Hwang Select AUD Income Fund - MYR
Australia-General
5.3
-1.3
8 AMB LifeStyle Trust Fund Today
Malaysia-Equity Exposed
5.2
2.5
9 RHB Retirement Series - Conservative Fund
Malaysia-Equity Exposed
5.1
1.2
10 Eastspring Investments Global Target Income Fund
Global-General
5.1
2.2

Source: Bloomberg, iFAST Compilations. Data as of 30 June 2017. Returns in MYR terms with any income or distribution reinvested.

Malaysia-Equity Exposed Funds Shone

Malaysia’s equity market soared by more than 9% in the first half of 2017, posting the highest first half return since 2010. In the first quarter of 2017, Malaysia’s economic growth accelerated to 5.6%, surpassing market expectations. On top of that, the strong rebound at the local bourse has been supported by decent earnings growth. On aggregate, the top 30 companies listed on the Bursa Malaysia reported total earnings of approximately RM15.9 billion for 1Q 2017, accelerating about 18.6% y-o-y. In addition, more than half of the FBMKLCI index constituents delivered earnings that outperformed the analysts’ estimates. As such, there are 5 out of the 10 top-performing fixed income funds were Malaysia-equity exposed fixed income funds.

Funds with AUD Exposure Continue to Top the List

Year-to-date as of 30th June 2017, Aussie Dollar appreciated by more than 1.7% against Ringgit Malaysia. Hence, the AUD-exposed funds like Affin Hwang World Series - Global Income Fund - AUD Hedged Class, RHB Asian High Yield Fund - AUD and Affin Hwang Select AUD Income Fund continue to be the beneficiaries from the appreciation of Aussie Dollar against Ringgit Malaysia.

However, over the second quarter of this year, these AUD-exposed funds posted negative return (see table 1). The losses were due to the translation loss from the strengthening of Ringgit against AUD over the same period.

Once again, given the stellar performance of these small-cap funds, we would like to advocate investors to be mindful of their supplementary portfolio exposure as we continue to see strong investors interest in these top performing small-cap funds. While we opine that the Malaysian equity space remains a bright spot for domestic investors, investors should be aware of the risk of being overly concentrated on home country investments.

Bottom Performing Fixed Income Funds

Table 2: Bottom 10 Performing Equity Funds

Ranking
Fund Name
Category
1H17 return (%)
2Q2017 return (%)
68 United Asian High Yield Fund - MYR
Asia including Japan-High Yield
-0.4
-2.4
69 United Asian High Yield Fund - USD
Asia including Japan-High Yield
-0.4
-2.3
70 Affin Hwang World Series - Global Income Fund - USD
Global-General
-0.7
-1.3
71 RHB USD High Yield Bond Fund - USD
US -High Yield
-0.8
-1.4
72 Templeton Global Total Return - USD
Global-General
-0.9
-3.8
73 RHB Asian High Yield Fund - USD
Asia excluding Japan-High Yield
-1.0
-2.4
74 RHB Asian Total Return Fund
Asia including Japan-General
-1.1
-1.9
75 Affin Hwang AIIMAN Global Sukuk Fund - USD
Global-General
-1.4
-1.8
76 Affin Hwang AIIMAN Global Sukuk Fund - MYR
Global-General
-2.0
-1.9
77 Eastspring Investments Asian High Yield Bond MY Fund - USD
Asia excluding Japan-High Yield
-2.4
-3.8

Source: Source: Bloomberg, iFAST Compilations. Data as of 30 June 2017. Returns in MYR terms with any income or distribution reinvested.

Strong Ringgit Dragged the Performance of Funds with Foreign Exposure

Given the strong rebound in Ringgit, our local currency emerged as the strongest currency among its Asian peers for the second quarter of this years. The rebound in Ringgit is supported by the strengthening economic fundamental such as improving external trades, ameliorating consumer sentiment and business condition as well as accommodative monetary policy. As such, Malaysia’s assets appear to be attractive to foreign investors. This is evidenced from the foreign funds net inflow into the local equity market of RM 9.96b as of 7th July 2017.

Back in December last year, our central bank has implemented the new FEA rulings which constrained the ability of foreign investors to hedge up to only 25% of Ringgit asset. Subsequently, this has triggered a huge reduction in foreign holdings in MGS due to the limitation in carrying out hedging. However, in April this year, our central bank has eased the FX hedging rules to allow all registered non-bank entities to hedge up to 100% of their underlying assets. Hence, the easing policy has led to a net foreign inflow into both local equity and bond segment in April and May. The improving foreign demands could be one of the factors that led to the strengthening of Ringgit.

Early this year, we have also reminded our investors to be cautious when investing into fixed income funds with foreign exposure and stop chasing FX return from foreign bond funds. Reason being, we see limited downside for Ringgit this year, hence, investors might incur FX losses should the Ringgit rebound.

Conclusion:

Given the expectation of tightening global monetary policy, bond funds with longer duration are likely to get hit in this rising interest rate environment. On top of that, looking at the current yield across various bond segments, the global bond markets are getting pricier as the current yield is trading below its historical average.

For the second half of 2017, we still remain our call to underweight bonds vis-à-vis equities. However, given the strong rally in global equity market in the first half, we have reduced our overweight in equity to 5% from previous 10%. For the following quarters of the year, we advocate investors to stay short on duration in order to avoid taking unnecessary interest rate risk. Last but not least, as we still see limited downside for Ringgit in the second half, investors should be cautious when investing into foreign fixed income funds.

For investors who are looking to invests in unit trust funds, you may refer to our recently released Recommended Fund 2017/18. (Grab this exciting opportunity to grow your portfolio!)

See: Why You Should Consider FSM Managed Portfolio?


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