Despite 2023 being calmer than in previous years, asset managers faced challenges. Dealing with inflation, supply chain disruptions, interest rate changes, and geopolitical risks made it a year requiring swift responses to market changes.
Reflecting on the year from a fixed income standpoint, Arvind Subramanian, senior analyst of manager research at Morningstar, highlights its extreme volatility.
Despite robust growth and optimism in equities markets, fixed income asset managers faced numerous hurdles, with interest rate volatility standing out as the most prominent challenge.
At the start of last year, the US 10-year treasury yield was around 3.5% before rising to 5% in October. There was a sharp rally in the last quarter of the year before yields ended at around 4%.
With volatile interest rates coupled with several Chinese property-related defaults, it is clear that 2023 was not plain sailing for fixed income managers in Asia.
Subramanian says the managers still managed to deliver respectable returns.
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The Morningstar Asia bond category aggregates all Asia bond funds, providing a “respectable” 5.5% return in 2023. “Keep in mind that this was after 2021 and 2022 when fixed income provided negative returns. In that way, it gives a sense of respite, although this is mainly due to the sharp rally in 4Q2023,” he adds.
Fixed income managers still delivered respectable returns in 2023 despite unfavourable conditions, says Morningstar’s Arvind Subramanian
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Chinese real estate pressure
According to Morningstar’s discussions with the industry, asset managers believe that central bank monetary tightening will end in 2024, which should reduce volatility. Nevertheless, they remain wary of inflation risks and the government bond supply.
Asset managers closely monitor elections across various markets this year, particularly the upcoming US presidential elections scheduled for November and the potential general elections in India in the coming months.
However, Subramanian acknowledges asset managers’ inherent difficulty in predicting election outcomes. Therefore, they are vigilant, monitoring potential risks as events unfold.
Asset managers approached last year with optimism for China, adjusting their portfolios to align with promising reopening policies. However, the country’s real estate sector remained under pressure due to macroeconomic challenges, declining property sales, and specific credit events affecting issuers.
Subramanian underscores the situation of Chinese property behemoth Dalian Wanda, which entered the offshore dollar bond market early in 2023 — marking the first such move by a Chinese property-related company.
This initially fueled optimism for a sector rebound. However, subsequent downgrades to the firm’s credit rating quickly dashed those hopes, leading its bonds to trade at distressed levels in the secondary market.
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Midway through the year, another Chinese property company, Country Garden, encountered liquidity issues and sector-wide challenges, eventually defaulting on its offshore bonds in October.
Asian bond issuance decline
Subramanian notes that Chinese high-yield issuers currently resort to private debt markets, onshore bonds, or bank loans, while asset managers remain cautious. “When we speak to asset managers, most remain wary about the sector and hope to see property sales recover before actually being optimistic.”
He adds: “One interesting point is that excluding the Chinese property sector defaults, the Asia high-yield bond fund default rates have been quite low, in the 1% or 2% range.”
He also points out that outside of the property sector, the rest of the bonds issued by issuers from sectors such as financials and industrial had been doing well, notwithstanding spillover impact.
Additionally, Chinese government bonds performed well last year due to interest rate cuts. Certain trends may have gone unnoticed amidst the ongoing concerns surrounding Chinese property-related issuers.
One such phenomenon is the significant decline in Asian high-yield US dollar bond issuance. Asset managers note that primary issuance amounted to roughly US$5.3 billion ($7 billion) in 2023 through May, less than half the amount raised during the same period in the previous year, representing just 5% of the overall Asian US dollar bond supply.
Subramanian attributes this to changing issuer preferences, favouring cheaper local currency bonds or domestic bank loans compared with the higher cost of offshore debt funding.
This was catalysed by the series of rate hikes by the US Federal Reserve (Fed), which has increased the cost of funding for offshore US dollar bonds.
“When we speak to asset managers, we understand that they are hopeful as the Fed nears ending its monetary tightening, a lot of issuers can come back and raise some US dollar funding as well. They are not optimistic at the moment, but that is something they are looking forward to in the future,” he adds.
Acknowledging outperformers
Morningstar continues to recognise funds and asset managers that have delivered strong risk-adjusted returns in the past and are deemed capable of serving investors well in the future via its Morningstar Awards for Investing Excellence programme.
The awards are selected using a combination of past performance and risk and the Morningstar Medalist Rating.
Subramanian says the Morningstar Medalist Rating concisely represents Morningstar’s evaluation of investment strategies, focusing on three key pillars: “people,” “process,” and “parent.”
The rating system uses qualitative analysis and algorithmic techniques, either mimicking analyst decision-making or employing a combination of both to determine the pillar ratings.
These ratings are assigned on a five-tier scale ranging from gold to negative at the share class level.
For 2024 Singapore Morningstar Awards for Investing Excellence, the awards given are “Category Winner: Best Asia Global and Asian Bond Fund”, “Category Winner: Best Asia Equity Fund”, “Category Winner: Best Global Equity Fund”, “Best Asset Manager — Sustainable-Investing” and “Best Asset Manager”.
For funds, the Category Winner: Best Global and Asian Bond Fund went to PIMCO for its PIMCO GIS Global Bond Fund E Class USD Acc, which has a Bronze Morningstar Medalist Rating.
Subramanian says Morningstar likes that the managers led by Andrew Balls are skilled and have a flexible, diversified investing approach.
He adds that the strategy has delivered performance over the long term, partly due to its strong selection of corporates, sovereigns, asset-backed securities and currencies.
The Category Winner: Best Asia Equity Fund is clinched by Schroders for its fund Schroder Asian Equity Yield A, which has a Silver Morningstar Medalist Rating.
The strategy is led by portfolio manager King Fuei Lee, who has held this role since the fund’s inception in 2004.
Backed by a well-resourced team, the strategy has a distinctive investment process, emphasising companies with sustainable and growing dividends, adds Subramanian. Its focus on quality companies has also helped the strategy exhibit lower volatility.
The Category Winner: Best Global Equity Fund is given to Fidelity International for its Fidelity Global Dividend SR-Acc-SGD, which has a Bronze Morningstar Medalist Rating.
Once more, the strategy is equipped with robust managers led by Dan Roberts since its inception in 2012.
Subramanian notes that Roberts applies a quality-oriented approach but with a valuation-conscious mindset. He adds that the fund kept up well in rising markets but showed good resilience in falling markets.
For the Morningstar Asset Manager Awards, the Best Asset Manager — Sustainable-Investing award went to BNP Paribas Asset Management.
Subramanian says the fund house has consistently featured sustainable investing in the core of its strategic planning, echoing the manager’s ambition to become a sustainability leader.
BNP Paribas Asset Management carries a Morningstar ESG Commitment Level of “Advanced”.
Finally, Dimensional Fund Advisors has secured the Best Asset Manager award, demonstrating a focus on serving investors’ interests.
Despite recent challenges related to outflows, the firm has remained steadfast in its philosophy and has responded in a manner that benefits clients while enhancing its competitiveness, Subramanian highlights.
The firm holds a Morningstar parent rating of “High.”
Continuing its role in providing independent investment insights, Morningstar has launched the beta version of its AI chatbot Mo.
Mo shares independent advice conversationally on Morningstar platforms using the Morningstar Intelligence Engine.
Mo is the first of many apps on the Morningstar Intelligence Engine platform. It uses Morningstar’s wide range of equity and managed investment research, editorial content and ratings.
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