Find your way in a world of Global Fixed Income opportunities

By Legg Mason Asset Management 

03 Sep 2020

ANCHOR YOUR PORTFOLIO, IMPROVE YOUR RISK RETURN WITH GLOBAL BONDS

For Singapore investors looking to build a solid foundation, global government bonds are a good place to begin.

Government bonds would be regarded as lowest risk, as governments should be least likely to default due to their ability to raise taxes or issue currency to ensure repayments. However, investors will be wondering where yield can come from seeing that about US$15 trillion or 28%¹ of global government bonds are negatively yielding as recent as July 2020.

This is when investing in the broader opportunity set of government bonds makes sense.

Options Beyond Traditional Developed Countries

In developed markets, there are investment grade government bonds opportunities besides the US, Western Europe and Japan. For example, in addition to standard German government fixed income, the bustling economy of Poland could present a complementing opportunity.  Both countries are developed and investment grade, but Germany is mired in manufacturing malaise whilst Poland is thriving on surging tourism, technology, energy and transport sectors. Yields differentials when comparing 10-year government bonds are also starkly in favor of Poland².

Additionally, investors looking for the relative stability of the globe’s top 20 economies but want a yield pick up over the US, Europe and Japan, can look to other G20 economies such as Australia, India, Indonesia, Mexico and China, where economic activity is increasingly driven by favourable demographics and stoic domestic consumption. The growing liberalization of these non-traditional G20 economies has also attracted foreign direct investment in addition to portfolio flows.

It is therefore no surprise with the increased physical and financial development that emerging market sovereign bonds have become higher quality over the past decade. Just over 10 years ago, a third of emerging market bonds were investment grade. A decade on, over 60% fall into that category with improved liquidity³.

Chart 1: Wide ranging yields across investment grade government bonds give investors options

Based on G20

Source: Bloomberg, as at 16 June 2020.
 

To manage expectations, returns of government bonds cannot be expected to track returns of risk assets such as equities or high yielding bonds because of the “haven” factor. However, comparatively lower yields in investment grade government bonds has the potential to be supplemented by capital gains. The uncertain economic environment has investors pouring into haven assets, driving up the price and pushing yields down. Large money managers such as pension funds and insurance companies have also continued purchasing low yielding government bonds to meet liability and liquidity requirements.

The Diversification Factor

Diversification is used by investors to manage risk and to limit the impact of market volatility on a portfolio. The idea behind diversification is that different asset classes will react in different ways to the same market event and, therefore, when one asset underperforms, in theory, any negative impact will be limited by those assets that perform well.

The best proof is really to examine how bonds can influence the return and performance volatility of a multi-asset portfolio across risk-off and risk-on periods.

Chart 2 shows bonds play a critical role in diversification. In a negative scenario, a 100% equity portfolio would have experienced more losses. With the inclusion of government bonds, both the volatility and the loss would be lessened. What is remarkable though, is when we look at the bull market of the last decade; the return per unit of risk was higher for the two portfolios holding bonds (Chart 3).

KEY TAKEAWAYS

Global government bonds are by no means dull in the realm of global bonds. In fact, with the potential for inflation beating returns, relatively low volatility and a close to negligible chance of defaults, global government bonds could be a solid way to anchor future investment decisions and disperse overall portfolio risk.

In addition, there are convincing and strategic reasons for holding government debt. Fixed income has demonstrated and delivered a lower-risk investment over time, provided diversification from equities and thus a degree of protection in downturns. Conversely, total returns from bonds can also be helpful when risk appetite returns, especially when the underlying conditions bode well for economies of emerging markets.

Furthermore, for Singapore investors with a portfolio invested in global bonds that are denominated in USD, the direction of the USD would be an element of consideration. Recent days’ dramatic measures on both the monetary and fiscal fronts to combat the economic and financial aftermath of COVID-19, has resulted in a flood of USD and capping further upside to the greenback. Additionally, weighing on the dollar are mixed signals surrounding the US economy, the increasing attractiveness of non-USD denominated assets and burgeoning US government debt.

As such, having an exposure in a portfolio that potentially provides both the defensive nature of sovereign bonds while minimising any foreign exchange volatility will appear attractive in current times.

FIND YOUR WAY IN A WORLD OF GLOBAL FIXED INCOME OPPORTUNITIES WITH LEGG MASON WESTERN ASSET GLOBAL BOND TRUST.

Anchor your portfolio with a global sovereign bond fund that has:
•   Global and diversified allocation across 13 countries
•   Investment grade credit quality of AA⁴

•   Non-SGD exposures are actively hedged back to minimize foreign exchange volatility

•   Included under the CPF Investment Scheme (CPFIS) where one can invest using CPF savings from Ordinary Account (OA) and Special Account (SA)

•   CPF Risk Classification: “Low to Medium Risk -Broadly Diversified”

•   Diversify risks away from other asset classes while outperforming bank rates⁵

•   Won multiple awards⁶ over the years

•   Managed by Western Asset Management, one of the largest and established fixed income manager

Diversify risks away from other asset classes while outperforming bank rates⁵

Returns Vs Volatility over 10 years (in SGD terms)

Sources: 

¹ Bloomberg, Bloomberg Barclays Global-Aggregate Index. 27 July 2020.

² Bloomberg, Poland 10 Year Government Bond Yield = 1.342%. Germany 10 Year Government Bond Yield = -0.435%.

³ Bloomberg, JP Morgan EMBI Global Diversified Index, Investment Grade portion, 31 November 2009 to 31 November 2019

⁴ Source: Western Asset and Legg Mason, as of 31 July 2020. Credit Quality: Nationally Recognised Statistical Rating Organisation’s (NRSRO’s) assess the likelihood of bond issuers defaulting on a bond’s coupon and principal payments. The credit quality allocation by Western Asset Management for Legg Mason Western Asset Global Bond Trust assigns each security the lower rating from three NRSRO’s (Standard & Poor’s, Moody’s Investor Services and Fitch Ratings, Ltd.). If only one NRSRO assigns a rating, that rating will be used. Securities that are not rated by all three NRSRO’s are reflected as such. The lower the overall credit rating, the riskier the portfolio. The credit rating is expressed as a regular letter rating (from high to low quality): AAA, AA, A, BBB, BB, ...D.

⁵ Source: Bloomberg, Legg Mason, as at 31 July 2020, calculated into SGD terms. Legg Mason Western Asset Global Bond Trust represented by the Class A Accumulating SGD share. Fund performance (load-adjusted figures in parentheses) over 3-month at 3.04% (-0.05%), Year-to-date at 7.61% (4.38%), 1-year at 9.64% (6.35%), 3-year annualised at 4.52% (3.47%), 5-year annualised at 3.31% (2.68%); 10-year annualised at 3.26% (2.94%) and since inception annualised at 2.40% (2.28%); Global Bonds represented by the Fund’s benchmark which is FTSE World Government Bond Index ex Japan hedged to S$ from 1 April 2011. For the period from 3 January 2005 to 31 March 2011, the benchmark was FTSE World Government Bond Index (S$) ex Japan. Index. Fund’s benchmark performance over 3-month at 1.48%, Year-to-date at 7.46%, 1-year at 8.34%, 3-year annualised at 5.86%, 5-year annualised at 4.59%, 10-year annualised at 4.15% and since inception annualised at 3.94% ; Emerging Market Bonds represented by J.P. Morgan GBI-EM Global Diversified Composite Index; Emerging Market Equities represented by MSCI Emerging Markets Index: Asia Pacific ex Japan Equities represented by MSCI Asia Pacific ex Japan Index; Asia Bonds represented by JP Morgan Asia Credit Composite Total Return Index; Global Equities represented by MSCI ACWI Net Total Return Index; Global High Yield represented by Bloomberg Barclays Global High Yield Total Return Index; US Equities represented by S&P 500 Total Return index; Singapore 3 Months rate represented by Monetary Authority of Singapore Benchmark Govt Bill Yield 3 Month, reproduced with the permission of the Monetary Authority of Singapore (“MAS”). By assessing and using any part of the data, you shall be deemed to have accepted to be legally bound by the Terms of Use of the MAS website, available at http://www.mas.gov.sg/Terms-of-Use. aspx.

⁶ BENCHMARK Fund of the Year Awards 2019 Singapore: Global Fixed Income – Local Currency (Best-in-Class) and BENCHMARK

Fund of the Year Awards 2016 Singapore: Global Bond – Retail Class (Best-in-Class). Source: BENCHMARK, based on performance of Class A (SGD) Acc. from 1 October 2018 to 30 September 2019 and from 1 October 2015 to 30 September 2016 respectively.

Important Information

Source: Western Asset Management and Legg Mason.

This document, provided by Legg Mason Asset Management Singapore Pte. Limited (“Franklin Templeton”) (Registration Number (UEN): 200007942R), is for information only and does not constitute an offer or solicitation to buy or sell any units in any fund.

The fund may invest in derivatives for hedging or efficient portfolio management purposes. The prospectus of the fund is available and may be obtained from Franklin Templeton or its authorised distributors. Investors should check with Franklin Templeton or its authorised distributors on whether a particular class of the fund is available for subscription. Investors should read the prospectus prior to any subscription. All applications for units in the fund must be made on the application forms accompanying the prospectus. Past performance is not necessarily indicative of future performance. All investments involve risk, including possible loss of principal. The value of the units in the fund and the income accruing to the units, if any, may fall or rise.

Distribution of this document may be restricted in certain jurisdictions. Any persons coming into possession of this document should seek advice for details of, and observe, such restrictions (if any).This document does not constitute the distribution of any information or the making of any offer or solicitation by anyone in any jurisdiction in which such distribution or offer is not authorized or to any person to whom it is unlawful to distribute such a document or make such an offer or solicitation.This fund is not available to US citizens, residents or greencard holders and may not be available in all jurisdictions.

Neither Franklin Templeton nor any officer or employee of Franklin Templeton accepts any liability whatsoever for any loss arising from any use of this document or its contents. The information in this document is confidential and proprietary and may not be used other than by the intended user. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The mention of any individual securities / funds should neither constitute nor be construed as a recommendation to purchase or sell securities, and the information provided regarding such individual securities / funds is not a sufficient basis upon which to make an investment decision. Portfolio allocations, holdings and characteristics are subject to change at any time. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. FranklinTempleton, its affiliates, officers or directors, may have an interest in the acquisition or disposal of the securities mentioned herein.

The minimum CPF interest rate for the Ordinary Account (OA) is 2.5% per annum. As announced in September 2019, the Government will maintain a 4% per annum minimum rate for interest earned on all Special Account and Medisave Account (SMA) and Retirement Account (RA) monies until 31 December 2020.Thereafter, interest rates on all CPF account monies will be subject to a minimum rate of 2.5% per annum unless otherwise announced by the Government. The first S$60,000 of your combined CPF accounts earns an extra 1% interest. To enable members to earn extra interest, only monies in excess of S$20,000 in your OA and S$40,000 in your Special Account can be invested. Please visit the CPF Board website for information on how the CPF interest rate is calculated.

Investors should note that the applicable interest rates for each of the CPF accounts may be varied by the CPF Board from time to time. Subscriptions using CPF monies shall at all times be subject to inter alia regulations and such directions or requirements imposed by the CPF Board from time to time.

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

Legg Mason Asset Management Singapore Pte. Limited is an indirect wholly owned subsidiary of Franklin Resources, Inc.

SG200801

dollarDEX's Disclaimer

All information here is for GENERAL INFORMATION only and does not take into account the specific investment objectives, financial situation or needs of any specific person or groups of persons. Prospective investors are advised to read a fund prospectus carefully before applying for any shares/units in unit trusts. The value of the units and the income from them may fall as well as rise. Unit trusts are subject to investment risks, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currencies should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance. dollarDEX is affiliated with Aviva but dollarDEX does not receive any preferential rates for Aviva products as a result of this relationship. Unit trusts are not bank deposits nor are they guaranteed or insured by dollarDEX. Some unit trusts may not be offered to citizens of certain countries such as United States. Information obtained from third party sources have not been verified and we do not represent or warrant its accuracy, correctness or completeness. We bear no responsibility or liability for any error, omission or inaccuracy or for any loss or damage suffered by you or a third party (including indirect, consequential or incidental damages) arising in any way from relying on this information.

This information does not constitute an offer or solicitation of an offer to buy or sell any shares/units.
This article has not been reviewed by the Monetary Authority of Singapore.

Information is correct as of 03/09/2020.