Corporate bonds a good bet amid global volatility in equities

PW2 • THEEDGE SINGAPORE
| JUNE 4, 2012
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I
n her career as an investment professional, bond fund manager Joanna
Ong has had to endure her fair share
of naysayers. She has been repeatedly told she is touting bonds just
when equities are about to surge. The
way she sees it, retail investors are often jumping on the wrong bandwagon
just when they should be looking at
protecting their principal and locking
in a decent yield.
If you are worried about the recent
choppy markets and headlines from
Europe about an imminent eurozone
breakup threatening global growth,
you might just want to take a closer look at increasing your exposure to
an income fund, says Ong, investment
director, global asset allocation, at
Eastspring Investment — the fund
management arm of UK insurance giant
Prudential Corp. “I believe bonds will outperform equities this year,” she says.
But isn’t there a looming bond bubble because far too much money has
flowed into fixed-income assets? Aren’t
risk-averse investors rushing to protect
their principal during a time when interest rates are at all-time lows and are
only likely to rise from current levels?
“People are quite rightly raising the red
flag on fixed-income investments but
bonds come in all shapes,” says Ong,
an accountancy graduate of Nanyang
Technological University, who has been
with Eastspring for 12 years. She previously worked at Bank Austria Creditanstalt as a risk manager.
While investors are understandably
wary about buying into government
bonds, whether in Asia or in safer markets in the developed world, corporate
bonds are another story. “The real opportunity in fixed income right now is
on the corporate side, not in government bonds,” she tells The Edge Singapore.
Why should corporate bonds be a
good bet since they are often priced
off government bonds? Don’t the best
corporate bonds drop a notch or two
when ratings agencies such as Moody’s
and Standard & Poor’s downgrade US
or Spanish government debt by even
one notch? “We believe there is still
value in the corporate bond market given the spreads you can get,”
says Ong.
Ong: I believe bonds will outperform equities this year
the eurozone, corporate bonds, which
lie in between equities and safe assets
such as cash or government bonds, offer fairly decent returns.”
But isn’t a big exposure to highyield US bonds a far riskier proposition in the current challenging global
environment? Not really, says Ong. She
points out that historically, high-yield
bonds that currently yield 7% to 8% in
the US have tended to perform better
compared with other asset classes such
as equities in a slow-growth environment, or just the sort of situation we are
in right now. “If global growth was going gangbusters, equities will definitely outperform but because we have a
slower growth outlook for the next 12
months, fixed income is an asset class
Equities are going to be volatile
that will probably give better returns.”
Although she concedes that multiAmong the top 10 holdings of her fund
decade low government yields have
are Bank of America’s bond that yields
kept credit yields low, she says there
8% and tobacco giant Reynolds Group’s
are still fairly attractive returns for inbond that yields 9.8%.
vestors who are looking at US highIn Asia, a big issuer of dollar bonds
yield corporate bonds and the Asian
in recent years were Chinese property
dollar bond market. “You can get an
companies that were unable to tap the equity markets with rights issues or
Performance of mixed-asset Singapore dollar conservative funds
the local currency bond
YTD
1-YEAR
3-YEAR
markets. Ong’s fund has
RETURN
RETURN
RETURN
DEC 30, 2011
MAY 25, 2011
MAY 25, 2009
stayed away from such
TO MAY 25, 2012 (%)
TO MAY 25, 2012 (%)
TO MAY 25, 2012 (%)
risky issuers. “China is
NAME
VALUE
RANK
VALUE
RANK
VALUE
RANK
Eastspring Investments Funds-Monthly Income Plan A
4.12
1
2.50
2
36.08
1
a big risk and a sharper
MyHome Fund — HomeSteady
2.89
2
3.95
1
NA
NA
slowdown will impact
Eight Portfolio A
2.55
3
0.87
3
15.92
2
Schroder Multi-Asset Revolution 30
1.51
4
NA
NA
NA
NA
Asia hard, though we beLionGlobal MAP — Conservative Portfolio
-0.41
5
-3.84
4
6.37
3
lieve that there will be a
Mixed Asset SGD Conservative Average (5)
2.13
5
0.87
4
19.45
3
soft landing there,” she
Return: NAV-to-NAV or bid-to-bid, income re-invested, calculated in SGD
says. Still, Ong is of the
average return of around 6%, compared with US Treasury yields, which
are at 1.7% right now, or Singapore
government bonds, which are yielding 1.6% and bank fixed deposits in
Singapore, which pay almost next to
nothing.”
Why be in bonds when dividend
yields in many Asian markets are now
two or even three times bond yields —
or the highest gap between dividend
yields and bond yields in history? “Deeper recession in Europe, slower economic growth in the US and how hard export-oriented Asian economies will be
hit, how much have we really decoupled from the Western economies and
how much can we grow in this environment are question marks, so buying
into equities is a lot riskier at the moment,” says Ong. “We believe equities
as an asset class are going to be very
volatile over the next year or so,” Ong
says. “For investors who are not able to
stomach such volatility or are concerned
about issues such as Greece’s exit from
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SECTION EDITOR
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Corporate bonds a good bet amid
global volatility in equities
EDITOR
Ben Paul
view that the Chinese property market
has quite a bit of froth. “A lot of investments in China have poured into the
property sector over the past few years
and there has been overbuilding in many
cities,” she says. Though the yields in
Chinese property company bonds may
look enticing, she would rather not go
there at this point.
Ong’s Eastspring Investments’ Monthly Income Plan Fund is basically “a fund
of bond funds”. The fund, which was
the best performer in its category this
year, was up 4.12% in Singapore dollar on a year-to-date basis as at May
25. Over a three year period, it was
up 36% (see table).It taps Eastspring’s
Asian dollar bond fund managed by
its fixed-income team as well as Eastspring’s US high-yields bond fund. The
fund invests mainly in dollar-denominated bonds issued by Asian companies. It is not exposed to the local interest rates cycle since Ong doesn’t buy
bonds denominated in local Asian currencies. “We are only exposed to Asian
interest rates to the extent that monetary easing or tightening impacts the
growth or earnings of the underlying
companies,” says Ong.
The objective of the fund is to target a regular payout to investors in
Singapore dollars, so even though it
is investing in US dollar bonds, the
fund fully hedges the currency risks.
Any appreciation in the local currency
against the greenback over the next
year would not dramatically impact
the fund’s return, even though there
is a small hedging cost. “We have
SingTel bonds that are issued in US
dollars, Malaysian oil giant Petronas’
US dollar bonds and Indonesian government sovereign bonds issued in US
dollars,” she says.
A balanced fund
Since her fund isn’t a pure bond fund,
it can invest up to 20% in high dividend-yielding equities. It is basically a
balanced fund that gives its manager
the flexibility to invest in high dividendyielding equities such as real-estate investment trusts in Singapore and utilities or telcos in the region. “Although
we are allowed to invest up to 20% in
high-dividend stocks in Asia, we have
just 5% of the money invested there,”
Ong says. “We have put together a diversified pool of assets, with a little bit
of equities, to try and generate sufficient yields to support the targeted return,” she says.
The retail fund, sold mainly via bank
and financial advisers, has had an average annual payout of 5% since its inception in 2005. Its net asset value is
$1 and it incurs a 1.5% annual management fee. The $660 million fund has
nearly doubled in size over the last two
years. “The low interest rate environment and uncertain market conditions
have made this fund so alluring to Singapore investors,” says Ong. “There is a
place for different asset classes in every
investor’s portfolio, depending on the
person’s investment horizon,” she says.
“But we really believe there is a strong
case to be made for investors in Singapore to have more corporate bonds in
their portfolios in the current uncertain
E
economic climate,” she says.
Reproduced by permission of The Edge Publishing Pte Ltd., Copyright © 2012 The Edge Publishing Pte Ltd. All Rights Reserved Worldwide.