Safety in troubled times

By Eastspring Investments

Written as of 5 June 2020

Containment measures in response to the COVID-19 pandemic have resulted in severe economic fallout and market turbulence around the world. With the outlook likely to remain overcast for some time, what are the options for investors? We tell you how the Eastspring Investments Unit Trusts – Singapore Select Bond Fund^# (the “Fund”) stands out from other similar opportunities out there, and why it is a sound choice for those seeking quality and safety in these uncertain times, coupled with good returns over the longer term.

Focus on high quality bonds

One of the key differentiating features of the Fund from other SGD focused bond or SGD focused income funds in the market is its emphasis on high quality bonds. Around 70%¹ of the Fund’s holdings are rated investment grade, and out of these around 24% are rated AAA. Conversely, other similar fund options may have significantly lower investment grade exposure and thus higher high yield exposure. The Fund’s substantial weighting in high quality Singapore and Asian corporate bonds, along with AAA-rated Singapore government securities, provides it with a defensive moat during times of market turbulence. We saw this exemplified in March, when high yield bonds sold off sharply amid concerns over corporate earnings and potential default as the pandemic worsened. During that month, the Fund’s performance was cushioned by its greater exposure to high quality Singapore and Asian bonds, where credit fundamentals remain strong even in the current challenging times as shown in Fig 1.

Fig 1: Balance sheets of Singapore, Asian corporates remain strong²

Investing across asset types to enhance yield

The flexibility to allocate across asset types helps the Fund achieve a balance of risk and return. Around 23% of the portfolio are allocated to Singapore government securities, which are the highest yielding among the core sovereign markets as shown in Fig 2. By comparison, some of the SGD focused bond or SGD focused income funds in the market have much lower or even negligible exposure to Singapore government securities. Further, by diversifying into quasi government and corporate bonds (8% and 67% of the portfolio, respectively), the Fund allows investors to benefit from yield pickup, which can amount to nearly 3% based on prevailing local rates³. This is a viable option in the current low interest rate environment.

Fig 2: Singapore yields highest among core sovereign markets⁴

True-to-label Singapore bond fund

Indeed, to enhance yields, the Fund is able to invest in issuers outside of Singapore. Up to 30% of the portfolio can be allocated to non-SGD bonds and foreign currency exposures are hedged back to SGD to minimise currency risk. Nevertheless, the Fund provides a true-to-label Singapore bond play, given its 60% allocation to Singapore issuers as shown in Fig 3. Conversely, other fund options out there may have substantially greater exposure to issuers offshore. While the broader Asian fixed income market is an attractive universe, the Fund chooses to have the bulk of its weighting in homegrown issuers to give investors the stability that SGD bonds tend to offer.

Fig 3: The Fund is a true-to-label Singapore bond play

Duration play

The Fund’s maturity breakdown is spread across the curve as shown in Fig 4, with an overall average duration of 7.4 years⁵. While some may argue that shorter duration bond funds are more resilient in a market selloff, we think the Fund’s longer duration profile stands it in good stead to perform well in the current environment of economic and market uncertainty. This is because monetary and fiscal policies around the world, including in Singapore, are expected to remain accommodative and expansionary, which should keep rates well anchored for some time, in turn benefitting bond prices and fund returns. Nevertheless, the Fund also has substantial exposure to short to mid-dated paper, or bonds with maturities 10 years and under. This provides a hedge against potential spikes in market volatility. Since inception, the Fund’s NAV has posted steady growth as shown in Fig 5. 

Fig 4: The Fund has exposure across the yield curve

Fund size and long-term track record

While direct investments in bonds are certainly possible, they may not necessarily be the best way to optimise returns over time. Not only are capital outlays much larger for retail investors but choices may also be limited, which may increase issuer or concentration risk. The Fund’s size at S$1.23bn⁷ makes it one of Eastspring’s most successful flagship strategies, suitable for clients looking for well tested, quality and stable investments. Being a fixed income investor with significant scale of operations in Singapore and Asia, we enjoy economies of scale, which provide us with better pricing power when executing trades with counterparties. We typically have larger order books, which allow us to participate and potentially obtain better allocations in a new bond issue. Since its inception in April 2011, the Fund’s annualised return has outperformed its benchmark⁸, making it a worthwhile investment to hold over the longer term through various stages of an economic or market cycle.

Sources and footnotes:

^# The CPF interest rate for the Ordinary Account (OA) is based on the weightage of 80% of the average 12-month fixed deposit and 20% of the average savings
rates published by the major local banks. Under the CPF Act, Chapter 36 of Singapore, the CPF Board pays a minimum interest of 2.5% per annum when this
interest formula yields a lower rate. Savings in the Special and Medisave Accounts (SMA) are invested in Special Singapore Government Securities (SSGS) which
earn an interest rate pegged to either the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%, or 4% whichever is higher,
adjusted quarterly. New Retirement Account (RA) savings are invested in SSGS which earns a fixed coupon equal to either the 12-month average yield of the
10YSGS plus 1% at the point of issuance, or 4%, whichever is higher. The interest credited to the RA is based on the weighted average interest rate of the
entire portfolio of these SSGS invested using new and existing RA savings and is computed yearly in January. As announced in September 2019, the Singapore
Government will maintain the 4.0% per annum minimum rate for interest earned on all SMA and RA monies until 31 December 2020. Thereafter, interest rates
on all CPF account monies will be subject to a minimum rate of 2.5% p.a. (unless the Singapore Government extends the 4% floor rate for interest earned
on all SMA and RA monies). The first S$60,000 of a CPF member’s combined CPF accounts earns an extra 1% interest. To enable CPF members to earn extra
interest, only monies in excess of S$20,000 in a CPF member’s OA and S$40,000 in a CPF member’s Special Account can be invested. In addition, CPF members
aged 55 and above will also earn an additional 1% extra interest on the first S$30,000 of their combined CPF balances (with up to S$20,000 from the OA). You
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 (amongst other things) regulations and such directions or requirements imposed by the CPF Board from time to time. Please visit
the CPF Board Website for further information on CPF interest rates.

¹ Eastspring Investments, all Fund positioning and asset allocation mentioned and presented in this article as of 30 April 2020 unless otherwise stated

² Bloomberg, MSCI, as of 31 March 2020

³ Based on Eastspring’s calculation of yield of the sub-sectors of the Fund’s benchmark, the Markit iBoxx ALBI Singapore Index, as of 30 April 2020

⁴ Bloomberg, as of 30 April 2020

⁵ Eastspring Investments, as of 30 April 2020

⁶ Eastspring Investments, based on SGD price, as of 18 May 2020

⁷ Eastspring Investments, as of 30 April 2020

⁸ Eastspring Investments, based on SGD returns net of management fees of 0.5% p.a., as of 30 April 2020

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 05/06/2020.