Highlights - Fullerton USD Income Fund Manager Interview
How have Asian credit markets fared in the first quarter of 2017?
Asian credits have delivered a strong performance in 1Q17. The JACI Composite Index (JACI) returned 2.6%1, supported by tighter spreads and strong technical support, in the form of continued inflows into emerging market fixed income funds. The JACI Investment Grade (IG) Index returned 2.3%1 in 1Q17; both IG sovereigns and quasi sovereigns outperformed with returns of 3.9%1 and 2.5%1, respectively.
Comparatively, high yield bonds have outperformed IG credits, with the JACI High Yield (HY) Index posting a strong gain of 3.5%1 in 1Q17. In particular, high yield issues have benefitted from the continued chase for yield. From a valuation standpoint, Asian credit spread valuations have tightened considerably after a strong first quarter performance; valuations remain near historical highs. In particular, HY valuations are looking very rich, and the search for yield has led to significant spread compression between IG and HY.
How has the Fund performed?
FUSIF did well in the first four months of 2017 with a gross return of 3.3%2 in the year to end April 2017. Asian credits had a strong quarter, supported by tighter spreads, which benefitted fund performance. Positive yield carry was another key driver of returns over the quarter. The Fund has performed even better since its inception on 15 April 2016, with a cumulative gross return of 6.1%2 as of end April 2017.
Are you still finding value in Asian credits?
Yes. We continue to broadly prefer IG names over HY, which offer more attractive relative valuation. Furthermore, IG credit fundamentals remain broadly sound, with credit profiles that are able to withstand earnings weakness in a challenging operating environment. Within the investment grade space, we prefer standalone investment grade, ‘BBB’ credits that offer higher spread cushion against rising interest rates.
Within high yield, we stay cautious on overall sector valuation levels, though we expect stabilising fundamentals and lower net supply to provide some technical support to the sector. We remain nimble in managing our high yield exposures and will selectively add to our HY positions for carry.
What about the near term impact of rising interest rates on the Fullerton USD Income Fund (“FUSIF”)? What is your investment strategy?
We expect FUSIF to be affected should yields move significantly higher within a short time period. However, we are of the view that the path of interest rate hikes would remain gradual, in line with the Fed’s guidance. We remain cautious in terms of credit strategy, favouring high quality credits with sound fundamentals, which we believe will be more defensive in a rising rate environment. On duration, we have maintained a portfolio duration of 4.3 years as at end March, and we would manage duration strategy tactically depending on rates market developments. From a sector perspective, financials and real estate continue to be our larger sector exposures within the portfolio. We maintain a diversified exposure within financials, favouring banks and insurers with sound credit fundamentals in strong financial regulatory jurisdictions. Within real estate, we maintain a diversified portfolio, preferring blue-chip real estate and property names in the region, as well as selective Chinese property players with improved credit fundamentals.
Tell us about the key features of the Fund.
FUSIF addresses investors’ needs for higher yields (vis-à-vis fixed deposits) and income distribution. The Fund invests in a diversified portfolio of primarily IG bonds, with at least 70% of the portfolio invested in IG bonds. The Fund opportunistically invests in HY bonds to enhance returns - up to 30% of the portfolio may be invested in HY bonds.
FUSIF is actively managed to mitigate risk and achieve total returns; exposure is diversified across sectors and countries to manage concentration risk. Careful credit selection helps to manage downside risk, while interest rate risk is managed by ensuring that portfolio duration does not exceed 5 years. Duration is actively managed with the use of interest rate swaps and US Treasury futures. The fund’s returns are managed in USD terms but hedged back to SGD for local investors (SGD-hedged class is also available for SGD-based investors). Regular income may be provided through quarterly distributions3.
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1 Source: Bloomberg, J.P. Morgan
2 Bid-to-bid returns for Fullerton USD Income Fund – Class B. Inception date is 15 April 2016. Returns are calculated on a single pricing basis in USD with net dividends and distributions (if any) reinvested. Bid-to-bid adjusted returns of -0.91% include an assumed preliminary charge of 3% which may or may not be charged to investors. Source: Fullerton Fund Management Company Ltd.
3 Distributions (if any) may be declared at the absolute discretion of Fullerton Fund Management Company Ltd and are not guaranteed. Distribution may declared out of income and/or capital of the Fund, in accordance with the Prospectus.
Disclaimer: This publication is for information only and your specific investment objectives, financial situation and needs are not considered here. The value of units in the Fund and any accruing income from the units may fall or rise. Any past performance, prediction or forecast is not indicative of future or likely performance. Any past payout yields and payments are not indicative of future payout yields and payments. Where distributions (if any) are declared in accordance with the Prospectus, this may result in an immediate reduction of the net asset value per unit in the Fund. Applications must be made on the application form accompanying the Prospectus, which can be obtained from Fullerton Fund Management Company Ltd (UEN: 200312672W) or its approved distributors. You should read the Prospectus and seek advice from a financial adviser before investing. If you choose not to seek advice, you should consider whether the Fund is suitable for you. All information provided herein regarding JPMorgan Chase & Co. (“JPMorgan”) index products (referred to herein as "Index" or "Indices"), is provided for informational purposes only and does not constitute, or form part of, an offer or solicitation for the purchase or sale of any financial instrument, or an official confirmation of any transaction, or a valuation or price for any product referencing the Indices (the “Product”). Nor should anything herein be construed as a recommendation to adopt any investment strategy or as legal, tax or accounting advice. All market prices, data and other information contained herein is believed to be reliable but JPMorgan does not warrant its completeness or accuracy. The information contained herein is subject to change without notice. Past performance is not indicative of future returns, which will vary. No one may reproduce or disseminate the information, whether in whole or in part, relating to the Indices contained herein without the prior written consent of JPMorgan. J.P. Morgan Securities LLC (the "Index Sponsor") does not sponsor, endorse or otherwise promote any Product referencing any of the Indices. The Index Sponsor makes no representation or warranty, express or implied, regarding the advisability of investing in securities or financial products generally, or in the Product particularly, or the advisability of any of the Indices to track investment opportunities in the financial markets or otherwise achieve their objective. The Index Sponsor has no obligation or liability in connection with the administration, marketing or trading of any Product. The Index Sponsor does not warrant the completeness or accuracy or any other information furnished in connection with the Index. The Index is the exclusive property of the Index Sponsor and the Index Sponsor retains all property rights therein.