Positioning for yield in time for a global restart
As liquidity conditions improved, our portfolio manager shares how we are positioned for income opportunities across asset classes.
After weeks of market volatility driven by COVID-19, continued concerns on the economic implications were compounded by a plunge in oil prices in March 2020 amid a breakdown in production discussions.
The market uncertainties from the COVID-19 outbreak has reinforced the dovish bias for central banks. The US Federal Reserve (the Fed) lowered the federal funds rate to a target range of 0-0.25%2 via two emergency rate cuts in March. The Fed would also increase its holdings of Treasury securities by at least US$500 billion and its holdings of agency-backed securities (ABS) by at least US$200 billion in the coming months2.
Elsewhere, central banks in Asia have also lowered rates. The Reserve Bank of Australia on 3 March cut its cash rate to a record low of 0.5%3 while the Philippines and Thailand opted to cut their policy rates by 25 basis points in February4.
With the Fed enacted the emergency rate cuts, markets are now expecting further co-ordinated policy action. Pressure is also rising for the European Central Bank to cut rates.
Together with the latest oil price collapse, this has precipitated a renewed risk-off move in markets and has raised the risk of recession. So how could investors navigate changing markets and find yield in fixed income investing?
Going across the full spectrum5
In uncertain markets, investors could, based on their objectives and risk appetite, invest in a wide range of fixed income securities, covering not only traditional but also non-traditional fixed income for potential income opportunities.
A spectrum of fixed income yields6
In the view of our Global Fixed Income, Currency & Commodities (GFICC) team, a heightened possibility of rate cuts this year could be supportive for government bonds and some high quality corporates.
At the same time, the fallout from COVID-19 could be particularly negative for sectors with highly leveraged companies where cash flow disruptions or delays could be damaging.
Taking a quality tilt
As a hedge against the growing risks of COVID-19 being a global pandemic, our GFICC team7 has been de-risking by adding high-quality duration, increasing protection through credit derivatives. We have also taken a cautious and selective approach to high-yield (HY)8 by sector and issuer. As of March 2020, our GFICC team prefers defensive sectors such as telecom and health care while being relatively cautious towards cyclical such as energy, metals or mining.
As investors search for high-quality yield9, securitised markets, such as mortgaged-backed securities (MBS) and ABS as well as investment-grade corporate bonds, have been holding out relatively well as these sectors leverage the financial strength and resilience of the US consumer.
The sturdy US consumer
Generally, ABS and MBS have less correlation to risk assets such as equities and HY corporate bonds8. Unlike equities and HY bonds8, which are more closely tied to corporate balance sheets, the underlying assets of securitised debt are mostly loans extended to individuals. This means tapping into the balance sheets of consumers.
From a fundamental perspective, US consumption remains overall healthy. Moreover, sectors such as agency MBS are issued or guaranteed by US government-related bodies, and demonstrate defensive characteristics. They could be considered as an alternative to US Treasuries as a part of the overall portfolio allocation, especially in current heightened volatile market conditions.
As such, investing dynamically across debt securities that have lower or negative correlations to each other could make it possible for investors to capture fixed income opportunities in different market conditions while managing risk10 through diversification1.
Investors are starting to feel the impact of the oil price crash, COVID-19 outbreak and the ramifications for global economic activity and corporate earnings. They could remain defensive while keeping an eye on policy responses, and expect further de-risking.
As market uncertainties persist, diversification1 is essential alongside active management. Investing across multiple fixed income sectors could help investors better tap into potential income opportunities in a volatile market.
Investing opportunistically across the bond universe without benchmark constraints, the fund managers can take advantage of the flexibility in managing the portfolio.
Focusing on income
The fund managers manage the income of the Fund to help minimise fluctuations in dividend payments of its monthly distribution share classes*. Its USD (mth) class has maintained a distribution yield^ of 5% or above over the past two years. (*Aim at monthly distribution. Dividend rate is not guaranteed. Distributions may be paid from capital. Refer to important information 3)
Multiple debt markets and sectors
The Fund invests in a wide range of fixed income securities, covering not only traditional but also non-traditional fixed income, allowing for a wider source of income.
Compelling risk and return profile
The Fund has delivered stronger returns relative to the peer average, while exhibiting lower volatility compared with its peer group over 1-year, 2-year, 3-year and 5-year horizons.