Fixed Income  
Top and Bottom Fixed Income Funds 1Q2017: A Good Start To The Year For Fixed Income Segment April 17, 2017
Top and Bottom Fixed Income Funds 1Q2017: A Good Start To The Year For Fixed Income Segment
Author : iFAST Research Team


 1Q 2017 Top and Bottom Equity Funds: Small Cap – Big Returns!

Market Performance in 1Q 2017

Global fixed income markets were positive for the first quarter of 2017, with global bond segment represented by JP Morgan Aggregate Bond Index edging up by a tepid 0.1%. On the other hand, Asian bonds (Credit Suisse Asian Corporate Total Return Index), recorded a 0.2% positive return while EM bond segments, as represented by JP Morgan EMBI Global Total Return Index gained 1.8%. During the second week of March, the Federal Reserve (Fed) increased its benchmark policy rate by 25 basis points – a widely anticipated move. Bond yields across all segments fell (bond price increased) post-announcement, probably due to a rather dovish move from Fed and a tightening credit spread (see figure 1) amid improving global economic outlook.

[All returns in MYR terms, unless otherwise stated]

Chart 1: Tightening Spreads for Riskier Segments


Chart 2: YTM on Various Bond Segments

Overall fund returns in 2016

As of end-March 2017, there are 81 bond funds listed on our platform, with 78 of them having full quarter returns in 1Q2017. Over the quarter, most of the fixed income funds (98.7%) have recorded positive returns (see figure 3). FSM All Bond Index, which measures the average performance of fixed income funds on our platform, inched up by 1.4% while the FSMI Malaysia Bond Index, which measures the average performance of Malaysian fixed income funds delivered a 1.7% gain.

Chart 3: 2017 1Q Return Distributions for Fixed Income Funds

Top Performing FIXED INCOME Funds

Table 1: Top 10 Performing Fixed Income Funds

Ranking
Fund Name
Category
1Q 17 return (%)
1 RHB Asian High Yield Fund - AUD
Asia excluding Japan-High Yield
8.2
2 Eastspring Investments Asian High Yield Bond MY Fund - AUD Hedged
Asia excluding Japan-High Yield
8.0
3 Affin Hwang World Series - Global Income Fund - AUD Hedged Class
Global-General
7.4
4 Affin Hwang Select AUD Income Fund - AUD
Australia-General
7.1
5 Affin Hwang Select AUD Income Fund - MYR
Australia-General
6.6
6 AmConservative
Malaysia-Equity Exposed
5.2
7 Templeton Global Total Return - MYR
Global-General
4.7
8 Affin Hwang World Series - Global Income Fund - SGD Hedged Class - Class A (MYR)
Global-General
4.4
9 RHB GoldenLife Today
Malaysia-Equity Exposed
4.3
10 Maybank Global Bond Fund
Global-General
4.2

Source: Bloomberg, iFAST Compilations. Data as of 31 March 2017. Returns in MYR terms with any income or distribution reinvested.

Bond funds with AUD exposure stood out from their top performing peers

Over the first quarter of the year, funds with exposure to AUD, like RHB Asian High Yield Fund – AUD, Eastspring Investments Asian High Yield Bond MY Fund - AUD Hedged, Affin Hwang World Series - Global Income Fund - AUD Hedged Class and Affin Hwang Select AUD Income Fund dominated the top performing fixed income funds list (see table 1), thanks to the strengthening of AUD against MYR (4.4%). In fact, it has given the funds additional return in terms of currency translation gain.

Divergence in return for local bond funds with exposure in equities

As the broad market index for Malaysia bonds outperformed the FSM All Bond Index, several local bond funds like AmConservative, and RHB GoldenLife Today appeared in the top performing fund list, with commendable return of 5.2% and 4.3% respectively, partly due to their exposure to equities. The local equity market achieved robust performance of 6.8% return for the first quarter of 2017.

Although, inclusion of equities in the bond funds might enhance the overall fund performance, investors should take note that underperformance of stock picks by these equity exposed funds might cause the fund performance to turn the other way round. This can be seen in the bottom performing list (see table 2), with Manulife PRS - Conservative Fund - Class A and Manulife Shariah PRS - Conservative Fund - Class A delivering a mild return of 0.7% and 0.6% respectively.

 

Bottom Performing FIXED INCOME Funds

Table 2: Bottom 10 Performing Fixed Income Funds

Ranking
Fund Name
Category
1Q 17 return (%)
69  Opus Shariah Cash Extra Fund
Malaysia-General
0.8
70  AmDynamic Sukuk - Class A
Global-General
0.8
71  RHB Asian Total Return Fund
Asia including Japan-General
0.8
72  AmPRS - Dynamic Sukuk Fund - Class D
Global-General
0.8
73 Manulife PRS - Conservative Fund - Class A
Malaysia-Equity Exposed
0.7
74  Manulife Shariah PRS - Conservative Fund - Class A
Malaysia-Equity Exposed
0.6
75  Affin Hwang World Series - Global Income Fund - USD
Global-General
0.6
76  RHB USD High Yield Bond Fund - USD
US -High Yield
0.6
77  Affin Hwang AIIMAN Global Sukuk Fund - USD
Global-General
0.3
78  Affin Hwang AIIMAN Global Sukuk Fund - MYR
Global-General
-0.1

Source: Source: Bloomberg, iFAST Compilations. Data as of 31 March 2017. Returns in MYR terms with any income or distribution reinvested.

Foreign bond funds take a hit amid Ringgit strength

Following a sharp of depreciation (22.1%) against USD in the past two years, the Ringgit has marginally rebounded in the first quarter of 2017 amid stabilising commodity prices and the implementation of Foreign Exchange Administration rules by Bank Negara Malaysia. As such, within the bottom performing fixed income funds, we can notice that there are several global bond funds with USD exposure which saw their performance being negatively affected by the strengthening Ringgit. However, there are also some global bond fund with USD exposure (see table 1) being unaffected by the currency movement because the funds engage with hedging strategy which mitigated the effect of strengthening Ringgit.

Besides that, US-high yield corporate bond has experienced strong rally due to yield compression since the US presidential election with the expectation that Trump’s administration and his proposed aggressive fiscal stimulus can stoke the economy. Over the first quarter in 2017, the US-high yield corporate bond index delivered 2.9%, however, the only US high yield fund on our platform – RHB USD High Yield Bond Fund - USD posted a tepid return of 0.6% due to the Ringgit strength. Moving forward, perhaps a lower default rate on high yield bond due to improving corporate earnings and economic condition will likely to support the attractiveness of these segment. However, investors should be cautious as further yield compression in the high yield segment might raise concerns of potential overvaluation (see figure 4).

Chart 4: Yield for US HY Segment

This year, as we see limited downside for the Ringgit, we would like to remind investors to be cautious when investing into the global bond fund with foreign currency exposure. On top of that, investors should focus on the yield offered by different segments (see figure 5), instead of blindly chasing FX return from foreign bond as they might incur FX losses should the Ringgit rebound. Investors should ensure the expected returns is able to cover the potential FX losses if they opt for bond funds that have foreign currency exposure.

Chart 5: Yield from Different Bond Segments

Conclusion:

With the Fed’s dot plot showing two more rate hikes and the message from ECB signalling less need for accommodative policy going forward, interest rate risk will likely have larger impact on the long-duration bond. As such, investors should reduce their exposure to the longer-duration developed sovereign debt that is the most susceptible to rising interest rate environment.

As we are less optimistic on the fixed income segment, we remain our call to underweight bonds vis-à-vis equities in 2017. However, fixed income segment still play an important role as portfolio stabiliser for every investor, hence, we advocate investors to stay short on duration as we are seeing the end of rate cut cycle.

Back to local front, we expect Bank Negara Malaysia to keep Overnight Policy Rate (OPR) unchanged at 3.00% this year. Reason being, a tightening monetary policy might weigh on the growth of local economy while easing monetary policy may put on additional pressure to the recent sky-high inflation rate. To make the matter worse, an easing monetary policy might subsequently lead to further outflow of foreign funds. As a result, yield movement for Malaysian bonds, especially the sovereign debt, is likely to stay relatively stable throughout the year.


 


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