The ongoing Covid-19 pandemic outbreak still poses some headwind risk on top of the low-interest rate environment.
Despite this, there are still opportunities that investors could leverage in the fixed income space, particularly in Singapore-dollar denominated bonds, says Alvin Ong, Manulife Investment Management (MIM) director and portfolio manager of fixed income in Singapore.
Fixed-income assets, largely bonds, are an essential component of a balanced portfolio, with the rule of thumb that investors should hold 40% in fixed income for the steady returns and the remaining 60% in stocks for potential capital growth.
Aside from providing investors with diversification benefits, bonds also deliver income generation, the potential for capital preservation and hedge against an economic downturn.
That being said, the global bond markets may not seem attractive to some — the low-interest rates environment has resulted in most developed markets having bond yields that are trading in the negative territory, says Ong.
As at end-October, the total amount of negative-yielding bonds stood at US$10.7 trillion ($14.53 trillion), according to Bloomberg data.
“This means that many investors are receiving less money at the bond’s maturity than the original purchase price for the bond. Asia, however, is one of the few places where investors could still get positive yields and get compensated for the risk they are taking.”
While the pandemic-stricken region continues to experience uneven economic recovery, Singapore still continues to maintain a solid AAA rating by all three external rating agencies with a stable outlook, making it relatively attractive, says Ong.
Last year, the city-state’s economy contracted by 5.4%, making it the country’s worst-ever recession since independence. To help cushion the weaker economy, Singapore has implemented a $100 billion stimulus — almost 20% of the country’s GDP.
AAA rating gives peace of mind
Maintaining an AAA rating despite all these gives comfort to investors, says Ong. Many high-quality Singapore issuers have direct and indirect links to the sovereign rating. This underpins their stability, on top of their solid credit fundamentals, he explains.
“Looking ahead, we have made good progress in vaccine development and deployment across the region and especially in Singapore. We think Singapore’s growth for this year should come in at the bottom end of the government’s forecast of 6% to 7%.
“Given the unfortunate spike in cases, the government has tightened social distancing measures but we don’t think that it is significant enough to derail the economy like what was experienced last year,” he adds.
Amid the uncertain macroeconomic environment, MIM expects global central banks to continue with relatively accommodative policies. The US Federal Reserve, for example, has signalled its intention to taper before the end of the year, but Manulife expects the US central bank to keep interest rates close to zero at least for the first half of next year.
“As you know, they have upgraded their growth forecasts, because of the stimulus as well as the vaccine rollout. So we think the overall ease in financial conditions will be generally supportive for Singapore and as well as Asian US dollar bonds,” says Ong.
Local currency income assets stay key
As Singapore dollar-denominated fixed-income assets continue to generate stable and higher yields that investors seek as a source of regular income, Ong believes that the local currency income assets should remain a key component in investors’ portfolios.
MIM’s SGD Income fund, for example, aims to provide investors with income and long-term capital appreciation in Singapore dollars by investing primarily in Singapore, Asia and US dollar investment-grade bonds.
“This strategy is quite popular with investors who want to receive regular income in the local currency and want to invest in Asian dollar fixed income, but with a focus on Singapore. It is suitable for those looking for a potentially stable income stream and capital appreciation while taking a bit of risk,” says Ong.
The non-Singapore dollar-denominated bonds are hedged back into Singapore dollars, which means that the strategy’s fixed income risk is actively managed, says Ong. “We try to keep it at the minimum level possible,” he adds.
At least 70% of the portfolio is invested in investment-grade bonds for stability and a maximum 30% of the portfolio is invested in high-yield bonds for better yields. As at Sept 30, the fund’s top credit ratings are Baa/BBB at 47.13%, A/A at 22.1%, and Ba/BB at 20.09%.
Investors also benefit from actively managed interest rate risk, says Ong, adding that the strategy has a duration range of zero to five years. “We have managed the strategy from as low as two and three quarter years to as high as four and a half years since inception.
What we do is we use a combination of US Treasury futures and Singapore dollar interest rate swaps to hedge our underlying US and Singapore rates exposure respectively.
“For example, during the height of the Covid-19 outbreak last year, we removed all of our interest rates hedges to take duration as high as possible — close to four and a half years to take advantage of the moving lower interest rates. We subsequently saw rates moving significantly lower,” says Ong.
Hedging against higher interest rates
At the beginning of this year when the global economy improved and vaccinations were rolled out on a larger scale, MIM started to put more hedges on the portfolio to take it under three years to protect the strategy from higher interest rates. The firm had been using these hedging instruments for the portfolio through different cycles over the past five years, says Ong.
With more than 60 fixed income professionals spread across 10 different countries in the region, every single credit bought has to be approved by the credit research team. This ensures proper credit analysis, says Ong.
For instance, the team managed to avoid the high profile bond defaults in the China property market. “A lot of funds that held these bonds experienced a sharp drop whereas we were actually able to protect the downside risk quite a fair bit. We actually went relatively conservative heading to the selloff and when it took place, we saw the spillover effects into the other China high-yield property market.
Even the better quality names were also hit, representing attractive opportunities for us to add a bit more risk in these high-quality DD names with double-digit yields,” says Ong.
As at end September, the SGD Income fund’s top geographical allocations are Singapore (40.19%), China (25.39%), India (7.15%), Indonesia (5.7%) and Australia (4.83%). Moving forward, MIM’s fixed income team would continue to favour core holdings in investment-grade names across Singapore, Hong Kong, China, Indonesia and Malaysia.
Photo: Manulife Investment Management
