A focus on fixed income — curated bond funds (Fund Digest May 2023)

Why are bonds attractive now?

Fixed income has continued to enjoy the spotlight in 2023 thus far, as investors turn to bonds for the higher yields amid elevated inflation, rising interest rates, and a challenging macroeconomic environment. 

Prior to 2022, abundant liquidity had led to easy borrowing, but it also limited the earning potential of lenders due to the near-zero or negative risk-free rates. The tables turned in 2022, when central banks around the world hiked rates aggressively to combat high inflation. This roiled the fixed income market. For example, the Bloomberg Global Aggregate Index, representing the global investment-grade bond market, experienced its worst downturn in 30 years.

Going forward, while there is still uncertainty, the fixed income market's risk-reward trade-off has significantly improved after a challenging 2022. Higher interest rates have made borrowing more difficult, shifting the balance in favour of lenders now, from borrowers previously. Valuations in different fixed income sectors have improved, with current yields-to-worst nearing 10-year highs and exceeding the 10-year median.

Spotlight on selected bond funds

Fixed income is a diverse universe. The Endowus Investment Office has curated a list of funds from popular fixed income segments for your consideration, including short duration, investment grade, high yield, and emerging markets. 

On the Fund Smart platform, you can invest with Cash, SRS, or CPF, depending on the fund and share class.

As a quick primer, here are a few key metrics you may wish to consider when choosing a fixed income fund to invest in:

1. Duration: It measures the sensitivity of a bond’s price to interest rate movements. Typically, for every 1% change in prevailing interest rates, the bond price will move by about 1% in the opposite direction for every year of bond duration. For instance, when interest rates drop by 1%, the price of a five-year duration bond will rise by 5%. Generally, the longer the duration, the more sensitive the bond price is to rate changes — and therefore, riskier. At the fund level, the duration refers to the weighted average duration of all the single bonds that are included in the fund. 
2. Yield to maturity (YTM): It measures the total rate of return that will be earned from a bond when the issuer makes all interest payments and repays the original principal. Note that the yield to maturity is not the same as total return, which is a combination of both yield and capital appreciation. 
3. Credit quality: A measure of the issuer’s creditworthiness, predicting its ability to repay the debt, and implies how likely it is to default. Credit ratings range from AAA (best) to CCC (worst). The worse an issuer’s credit quality is, the higher interest or yield it will have to offer in order to reward the investor Typically, AAA to BBB are considered investment grade, which is safer — more creditworthy — than high yield. 

To learn more about the basics of bonds, refer to the next section below.

Short-duration bonds

Short-duration bond funds invest in bonds with shorter maturities. This limits the interest rate risk and aims for price stability. Such funds are particularly helpful in a rising interest rate environment, and can be great for more conservative investors who have a shorter investment horizon.

Global aggregate bonds

Global aggregate bond funds are benchmarked against the Bloomberg Global Aggregate Index, which is widely considered to be one of the best total bond market indices. These funds invest in a diversified portfolio of global investment-grade (higher-quality) government and corporate bonds. Global aggregate bond funds could serve as a robust baseline allocation in a portfolio to gain exposure to the fixed income market, and can be great for conservative investors with a long horizon.

Read more: Launch of the Amundi Index Global Agg 500m Fund for CPF investing

Global investment-grade credit

Global investment grade (IG) credit funds invest specifically in corporate bonds that are rated as investment grade. These funds allow investors to pick up additional yield as compared to global aggregate bond funds, without venturing into the riskier fixed-income segments such as high-yield bonds. Global IG credit funds are less diversified and riskier than global aggregate bond funds, but safer than global high-yield bond funds. Global IG credit funds can be great for conservative, long-term investors looking for yields higher than those of global aggregate bonds by taking on some incremental risk.

Flexible-income bonds

Flexible income bond funds are actively managed bond funds investing across multiple sectors of fixed income — including but not limited to government, corporate, securitised, and emerging markets. The fund managers actively manage the interest rate risk and credit risk exposure based on their market views, in order to achieve their investment objectives. This means that the managers’ views will have more of an impact on the fund’s performance as compared to other categories of funds.

Both of the flexible income bond funds listed here aim to maximise the current income level while maintaining a relatively low risk profile. Because of the differences in the fund managers' approach and positioning, we think they can be a great complement to each other and diversify single manager risk.

Global high-yield bonds

Global high yield (HY) bond funds invest specifically in corporate bonds that are rated high yield (lower quality). These bonds offer higher yield, but come with higher credit risk. Companies issuing HY bonds are generally more levered — they have a higher amount of leverage, or debt — and thus face a higher chance of default than IG bonds. That said, HY bonds are still a less risky investment than equities, and can be suitable for more risk-seeking investors who seek higher total returns but do not want to take on equity risk.

Emerging markets

Emerging-market bond funds invest in bonds issued by governments or corporates in emerging markets (EM). As these economies are more locally driven, they offer good diversification to investments in developed-market bonds. Given the higher risk associated with EM entities, such bonds allow investors to pick up additional yield as compared to the global aggregate bonds. Therefore, EM bond funds can be great for more risk-seeking investors who are looking for higher total returns.

In the table below, the Neuberger Berman fund has a short-duration focus and hence offers a lower-risk option within this EM category. Both the BlackRock iShares fund and the PIMCO fund invest primarily in emerging markets sovereign debt denominated in US dollars (USD). The Goldman Sachs fund invests primarily in emerging markets corporate debt denominated in USD.

For a quick overview of all the funds available on Endowus Fund Smart, refer to our investment funds list here. 

Customise your ideal investment portfolio in minutes with Fund Smart. The Endowus Fee for Single Fund Goals via Fund Smart (Cash, CPF, and SRS) is 0.3% p.a., reinforcing our commitment to reduce the cost of investing. This pricing means that more than 95% of the funds are now cheaper on Endowus than on any other fund platform, bank, private bank, financial advisor, or broker in Singapore.

Not sure how to invest with Fund Smart? Find out everything you need to know in our FAQs. If you wish to invest in an accredited investor-only (AI-only) fund or a non-SGD fund, please contact support@endowus.com.

Prefer to leave the fund selection to the experts? You may also invest in the Endowus advised portfolios. Consider our Flagship Portfolios, which have a varying mix of fixed income and equities, if you want a broad long-term allocation to grow your wealth. Or, if you wish to generate passive income through fixed-income investing, consider our Stable Income Portfolio. These portfolios have been optimised by the Endowus Investment Office to achieve the best balance of fixed-income funds in a single portfolio. 

Understanding fixed income

Not familiar with bonds as an asset class? Simply put, bond investors lend money to the issuers (essentially the borrowers), and in return the investors receive coupons — or interest payments — on a regular basis. These regular coupons are why bonds are also referred to as fixed income. Governments and companies issue bonds to investors when they want to borrow capital. 

When the bond matures, the issuer is supposed to repay the principal amount (the sum being borrowed) to the investor. A default happens if the bond issuer fails to repay the principal by the maturity date or misses a coupon payment.

To help you get started, here are four key terms investors need to know about bonds.

1. Total return: This is the overall gain (or loss) an investor realises from both income and capital appreciation (or depreciation) over a specific period. In the context of bonds, total return represents the combined impact of the coupon payments an investor earns as well as any changes in the bond's price (market value).

2. Risk: Lending money will entail (i) credit default risk, which refers to the potential loss if the borrower defaults, and (ii) interest rate risk, which compares the interest earned with the risk-free rate. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment (such as a bank deposit) over a specified period of time. A simple illustration of interest rate risk is if a friend borrows money from you and is paying you 3% interest, but you later find out that your bank’s fixed deposit offers 5% interest for the same amount. Essentially, you would have been better off financially putting the money at the bank rather than lending it to your friend.

3. Price fluctuations: Because bonds are traded, bond prices fluctuate based on the market's perception of risk. When the prevailing risk-free rate rises, new bonds will be issued at a higher interest rate, while the prices of existing bonds will drop. This comes as investors demand higher returns and favour the new bonds that are paying higher coupons. Similarly, a bond’s price may also fall when the credit spread increases, as it indicates higher credit risk. The credit spread is the difference in yield between a bond and a benchmark risk-free security with a similar maturity.

To learn more about bonds, refer to this article. Explore our Fin.Lit Academy to pick up tips on investing, wealth building, personal finance, CPF and SRS, and retirement planning.

Harness the power of fixed income in your investment portfolio 

Bonds have traditionally played two crucial roles in an investor’s portfolio. 

Firstly, they dampen overall portfolio volatility. The higher predictability of a bond’s cash flow means that it is inherently a less volatile asset class than stocks. 

Secondly, fixed income can act as diversifiers to stocks. Bonds often perform differently from stocks in various macroeconomic environments. For example, in a recession, investors tend to seek out less risky, safe-haven investments — this can result in the prices of equities declining while prices of high-quality bonds increase. The chart below shows that equities and bonds have typically moved in different directions during major global events.

Therefore, generally speaking, adding fixed income to a portfolio helps calibrate risk levels and enhance risk-adjusted returns. Furthermore, the fixed income universe is made up of diverse segments — offering a vast array of options for investors to mix and match different levels of risks and rewards from lending to a variety of governments and companies around the world.

<divider><divider>

Investment involves risk. Past performance is not necessarily a guide to future performance or returns. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endowus Singapore Pte. Ltd. (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

Investment into collective investment schemes: Please refer to respective funds’ prospectuses for details of the funds, their related fees, charges and risk factors. The listing of units of the fund on a stock exchange does not guarantee a liquid market for the units. Before making an investment decision, you are reminded to refer to the relevant prospectus for specific risk considerations.

For Cash Smart Secure, Cash Smart Enhanced, Cash Smart Ultra: It is not a bank deposit and not capital guaranteed, and is subject to investment risks, including the possible loss of the principal amount invested. Investment products are not insured products under the provisions of the Deposit Insurance and Policy Owners Protection Schemes Act 2011 of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme. Interest rates are indicative and subject to change at any time.

Product Risk Rating: Please note that any product risk rating (the “PRR”) provided by us is an internal rating assigned based on our product risk assessment model, and is for your reference only. The PRR is subject to change from time to time. The PRR does not take into account your individual circumstances, objectives or needs and should not be regarded as advice or recommendation to purchase, hold or sell any fund or make any other investment decisions. Accordingly, you should not solely rely on the PRR in making your investment decision in the relevant Fund.

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