In the last article, I pointed readers to some data showing how the current bond situation.
I thought this would also be a good time to review how the mutual funds/unit trusts that investors turned to for income are doing during this carnage.
Some investors naturally gravitate towards income funds. The high net worths were recommended strategies that involve leveraging income funds to boost yields in a “fundamentally sound manner”.
I wonder how many investors were shocked that funds made up of bonds can do returns like this.
Anyway, if you browse iFast’s Fundsupermart, you will be able to review a lot of fixed income funds. There are like 546 funds. Some of these funds are duplicates because some funds but different fund classes are considered different line items.
Some of these funds have benchmarks and some do not have benchmarks.
I cannot possibly cover all of them so I am going to be selective.
I am going to compare them against Bloomberg bond indexes so that you can see if the funds are able to do better than the benchmark indexes during this challenging period. We also try to compare against UCITS bond ETFs (which are listed on the London Stock Exchanges) that track some of these indexes if possible.
We are going to compare over year-to-date returns, 6-month annualized returns (means if you see the return as -20%, the actual return is probably -10%), 1-year, 3-year, 5-year annualized returns.
All returns include dividend payments from the funds. Returns are in USD. Unfortunately, the Bloomberg bond indexes used are unhedged and most funds are hedged to USD, with the odd funds that are in other currencies (I tried to use all USD fund classes), so there may be some difference in performance due to this irregular comparison.
Reviewing the Bloomberg Bond Indexes Performance
Before we look at the funds, let us look at the performances of the Indexes. We are comparing the periods of different time frames till 7-8 April 2022.
Year to date and in short term, the emerging market aggregate total return has the poorest return followed by Asia high yield bonds.
I suppose the emerging market total return did worse than the high yield because of its higher sensitivity to the interest rate. Except for Asia, the aggregate bond indexes in other regions did worse than the high yield bonds.
Despite being in the worse period for bonds in at least the past 10 years, the 6-month volatility of bonds is still much lower than the worse periods for equity. They are down an average of 6 to 10%.
Asian Bond Funds
Apparently, out of the funds selected, there aren’t a lot of Asian bonds.
Fullerton’s Asian Bonds seems to be highly recommended by Fundsupermart. From what I see, it did not beat the benchmarks.
The fund pays a dividend yield of 4.40% as per Fundsupermart.
Year-to-date the fund did -7.9% and slightly beat the Bloomberg Asia USD Investment Grade Bond Index.
But across the 6M, 1Y, 3Y, 5Y timeframe, it underperformed the index.
Asian High Yield Bond Funds
Asian high yield bond funds were damn popular because there are two sets of risk premium:
- Credit quality (as a junk bond)
The HSBC Asian high yield, Allianz Dynamic and Blackrock Asian High Yield have a listed dividend payout yield of greater than 10%.
That payout yield is kind of crazy and some of your financial independence minds will be going a bit crazy.
But notice that the degree of income payout is a choice. Some funds like Fidelity Asian High Yield has a much lower payout.
The right way to compare is to review the total returns, which include the capital appreciation (in this case depreciation) and dividend payout.
Those cells highlighted in light green are during the periods where the fund beat the Asian High Yield Index. Noticed that most funds, didn’t beat the benchmark they compared against, or there was no benchmark.
The benchmark, as well as all the Asian high yield funds, were negative in the past 5 years.
Goldman Sachs, UOB United and Pimco’s funds did well in a 1-year time frame but failed to do well over the long run. HSBC’s fund, with the highest payout, did well in the long run but did not do well short term.
China High Yield Bond Funds
I can only find one high yield bond fund that is focused on China. I didn’t include a China high yield bond index. The dividend payout yield of Fidelity China High Yield is an enticing 9.96%.
But like an Asia High YIeld bond, it’s been very negative for the past 5 years. Fidelity’s fund has no benchmark.
Global Aggregate Bonds
The global aggregate bonds are probably the space that will interest most investors that are not income-focused but trying to form a well-balanced portfolio.
The actively-managed funds have quite a fair bit of leeway in how they tilt the portfolios towards certain geographical regions, credit quality, and types of bonds, to try and outperform the markets.
There are some high-yielding bond funds here such as Templeton Global Total Return Bond ( 5.91%), JPMorgan Income (4.67%) and Pimco Income (4.28%).
The Bloomberg Global Aggregate Bond Index over three years have become negative, but you realize there are plenty of bond funds in this space that is still positive over the three-year time frame.
In fact, based on the amount of green, actively-managed bond funds did very well.
JPMorgan Income, Pimco Income, JPMorgan Global Bond Opportunities and Fidelity Global Bond managed to beat their benchmark index as well.
Global High Yield Bond Funds
Year-to-date, the global bond funds have rather similar drawdowns as the global bond funds, most likely because global bond funds have bond allocations that are more sensitive to interest rates.
What you would notice is that given the fall in unit price, the payout yield hovers around 4-6.6% for the high yield bond funds. I wonder whether such yields are considered attractive because in the past the yield-to-worst for high yield bond funds normally trade at 8-12%.
While you can see a lot of greens in the table, which represent outperformance over the Bloomberg Global High Yield Total Return Index, all the funds failed to beat their index well in the factsheets.
We also notice that if you have held on to the bond funds for 3-years, you would still be positive.
The iShares Global High Yield Corporate Bond UCITS ETF has quite disappointing performances over the 5 year period. It is kind of odd that the indexed ETF’s performance over different timeframes is worse than all the actively-managed funds.
The chart above is taken from my old article about rolling global high yield bond fund returns.
This table show the number of instances where the global high yield index corrected to this degree.
Global high yield is currently down like 6-7%. This is a pretty common degree of fall for high yield bond funds and it is always possible it will recover or more downsides because you can see there are a few periods where the fall is 15%. Those are the more extreme corrections and we are not there yet.
Here is the 5-year annualized rolling returns of high yield bonds going back to 1990.
The current 5-year annualized returns of the global high yield index is about 2.95% a year. From this historical chart, that is in the low end of the spectrum.
This might point to higher future expected returns but also…. there could be 50% more downside (since the lowest is when annualized return is -1.25% or -1.62%)
US$ High Yield Bond Funds
US$ high yield bond funds have pretty similar performances to the global high yield bond funds. This is not surprising as US is a large debt markets and a sizable component of global bond funds.
The iShares $ High Yield Corporate Bond UCITS ETF has a much better performance versus the actively-managed high yield bond funds compared to its Global High Yield counterpart.
The Fidelity US High Yield and Blackrock US Dollar High Yield are a couple of notable actively-managed bond funds that did pretty well over this intermediate timeframe.
Emerging Market Bond Funds
I mentioned that the emerging market bond funds is one of the worst performing segment based on index comparison.
The actively-managed bond funds are not doing very well in their performance versus the Bloomberg index.
Here is the 5-year annualized rolling returns of emerging market bonds going back to 1994.
We are currently at 1.56% a year on the Bloomberg EM Aggregate Total Return index. This is a different index to what I showed here but it should roughly be comparable.
Current returns is…. even lower than the lowest historical 5-year returns.
Future returns expectations should be higher.
Emerging Market High Yield Bond Funds
There is probably 1 emerging market high yield debt on my list and its performance are pretty on par with the index.
How High Yield and Emerging Market Bonds Performed in the Past
In the past, I did some research into how high yield and emerging market bonds performed over the past 25-30 years by looking at the global high yield and emerging market bond index performances.
I analyzed the index through rolling 5-year period so that you can see the range of performance you may enjoy over that timeframe.
You can review these two articles:
- The Beauty of High Yield Bond Funds – What the Data Tells Us
- Searching for Higher Yield in Emerging Market Bonds
There are two layers of considerations when you invest in actively-managed funds:
- How does it perform versus a sensible benchmark index?
- Should I have such an exposure to the geographical region, sub-asset-class, sector in my portfolio? and In what concentration?
Many income investors’ thoughts will be on the second layer, placing strong consideration due to their retirement needs or affinity towards those funds.
But what is equally important is to sometimes think about the first layer as well.
One of the purpose of this review is to take stock of whether in the actively-managed bond fund space, are the funds telling the same story as the Morningstar research where it shows that active management outperformance is higher (Read Could Actively Managed Funds Outperform Passively Managed Funds Over Longer Term?).
In general, its worse than the Morningstar research for the funds available to the Singapore investors. We do not see a greater percentage of actively-managed funds doing better than their passive ETFs or index funds. However, what’s surprising was how well a lot of global bond funds did versus the Bloomberg global aggregate bond index. I am not sure if its due to the hedged versus unhedged performances. This is something I would take a look if I managed to find the time to investigate.
At the same time, there are investors being too hard up, scrutinizing whether which funds will do well versus the index but totally missed out that the second layer (whether you should have exposure and how much) is a more important piece.
Some were very concentrated in bond funds, maybe due to their risk tolerance and for others their affinity towards income-paying unit trusts.
There is a limit what active-managers can do to give you absolute returns.
I think this is what investors have in mind but the reality is the managers are just trying to give you exposure to different sub-bond types. If all of the sub-bond types don’t do well, then your fund won’t do well. There is a limit to how much cash the manager can go to.
So one conclusion that you could draw from that quick stock take is… all the income-paying or non-income paying bond funds are down like 5-11% year-to-date. The degree how much its down depends on how much Asian high yield bonds are in their fund. If the amount of Asian high yield is very high, it is down more.
In the past, the active managers are able to do seemingly better because of exposure to sectors that does well but also they shifted the fund allocation to high credit risk bond types.
What provided the good performance is now dragging down the performances because the high yield, asian bond fund managers cannot go to too much cash or invest in other bond types unless they changed the mandate. So If Asian bonds are sold down, there is not much places to hide.
Lastly, within the Asian high yield bonds, we have a range of payout from 4% to 11%. The manager decides how much to payout as dividends with some being more adventurous to payout a higher amount while others decide a lower amount.
If you are evaluating if a fund is good or not, don’t judge the fund by the payout. Remove that lens, and compare the portfolio to bonds of similar nature. You would realize that high dividend paying Asian high yield bond funds and lower dividend paying Asian high yield bond funds have roughly similar performances (in this case they all underperform the indexes).
A high dividend payout, more than the fund can sustain, will eventually means the net asset value per unit will start going down. Many investors gravitate towards these income unit trust because they think these funds protect their capital.
So if the capital value starts going down, is your capital value being protected?
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