Monday, June 22, 2009

Bond funds??

I was reading an online magazine and a financial advisor from a reputable company suggested a bond fund portfolio for risk averse people. He claims that it has low risk and by having bond funds, one can invest in global fixed income and withdraw a portion of it from the bond fund periodically, funding one’s retirement.

Well, even though I am about to have exams in less than a week’s time, I can’t help but to write something to kick the joker’s ass.

I have compiled, as much as possible the SGD returns of bond funds, available to the DIY investor from fundsupermart. The below data are correct as at June 22nd, 2009.

Returns tabulated using the data of bid to offer returns to account for sales charges. Returns tabulated are also compounded. Example, if I invest $100 in Fund A and it gives me a 3 year compounded return of -2%, I will have $94.11 at the end of 3 years.

I have tried to compile the funds that are named like fixed income instruments. I could have inevitably missed many other bond funds. Apologies on that.

AIGIF SINGAPORE BOND FUND

Bid to offer returns:

3 years: -0.7%

5 years: 1.8%

ABN AMRO STAR EUROPE BOND

Bid to offer returns

3 years: -1.6%

5 years: -0.9%

DBS ASIA BOND FUND SGD (CL A) (only up to 3 years data)

Bid to offer returns:

3 years: -3.9%

5 years: NA

UOB UNITED INTERNATIONAL BOND FD

Bid to offer returns:

3 years: -2%

5 years: -0.1%

PIMCO HIGH YIELD BOND USD

Bid to offer returns:

3 years: -7.5%

5 years: -3.2%

SGAM TOTAL RETURN BOND S$

Bid to offer returns:

3 years: -3.7%

5 years: -2.2%

DBS SHENTON DYNAMIC BOND

Bid to offer returns:

3 years: -6%

5 years: -4%

FIDELITY INTL BOND A-SGD (only have 2 years of record)

Bid to offer returns:

1 year: -9.5%

2 years: -6.1%

FIDELITY US HY USD

Bid to offer returns:

3 years: -5.1%

5 years: -0.7%

ING RF EM MKTS DEBT HC EUR (only 4 years of record)

Bid to offer returns:

3 years: -3.3%

4 years: -0.9%

As one can see, most if not all of the bond funds returns are in the red!!

In Finance 101, we know that bonds are definitely part of the stock portfolio to lower the overall beta and risk of the portfolio. However, bond funds are altogether a different animal. There are a lot of expenses, upfront and inherent costs that erodes away investors’ value. The recent 3 years should theoretically be a bull market for bond funds, as equities tanked (they are inversely related, theoretically). Why is it that they are performing poorly as well? Are fund managers acting on the best interests of the investors? Are they imposing too hefty expense ratio or incurring unnecessary transactional fees that are ultimately borne by investors? We do not know.

If I were to invest in bonds, it will be truly bonds that pay me a fixed coupon rate and redeemable upon maturity. Not bond funds that pay me nothing and return me less than my principal!

Just for information sake, a bond is a debt issued by a company and pays a fixed amount (coupon) which will be redeemable at par value(price which was originally sold) by the company upon maturity. The maturity date can be 1 year to 100 years, depending on the financing needs of the company. It can be traded at the secondary (bond) market.

Ok, I hope I sound more convincing than the joker financial advisor. Who is employing me for financial advice now? Kidding!

6 comments:

Musicwhiz said...

Hi SG Blue Chip,

Perhaps the bonds did not belong to the blue chip categories ? And also, fees could be exorbitant which led to the under-performance of these funds. By the way, do your returns include dividends and payouts by the Funds as I believe Bond Funds do pay a regular "dividend" based on the coupons (interest) they receive.

Cheers,
Musicwhiz

Sgbluechip said...

Hi MW, the funds have all dividends reinvested, according to FSM.

Actually few bond funds pay dividends according to FSM listed bond funds. The dividends are factored into the NAV of the bond funds and investors can easily create homemade dividends by selling partial units of their bond/equity funds.

ghchua said...

Hi Sgbluechip,

I am holding DBS Shenton Dynamic Bond Fund in my portfolio currently and so I know what happens. It had been hit badly because they have invested in Lehman Brothers bonds. :(

Frankly speaking, DBS Shenton Dynamic Bond Fund is not a junk bond fund. It invests in investment grade bond and still got hit by default. And since an investment grade bond fund does not generate high coupon rate, a default in the bond fund might mean that the fund will be hit very badly and it takes a long time to even break even, let alone generating profits for investors.

LeeSeng said...

hi, ghchua,
you're saying that fund manager open their eyes wide and sign the minibonds contract even though they are someone in the industry, and yet, they can't understand the risk? or they understand that they only earn 5% at most and loss 100% at worst?

Sgbluechip said...

Hi LS, Lehman brothers also issued classic bonds which has little savage value when it defaults. I am not sure if fund managers are so silly to buy the minibonds as well.

By right bond holders should get something back when the issuer defaults as bonds are backed by assets of the company.

Bondholders are usually a few investors with a high percentage of debt holdings and thus able to force the company to liquidate and pay them back the debt when company defaults.

This is unlike shareholders, which are held by many with low percentage of holdings. Hence it is harder for them to come together to liquidate the company.

Wealth Journey said...

Depending on your capital, you might want to consider treating physical property as an alternative to bonds instead.

I am of the view that bonds if bought under par will give you upside limited to the discount you bought it at.

However, properties bought below par or even at par can have unlimited appreciation and can be held for the long term (99-999yrs).

Both will give you fixed income streams but the distinctive advantage of property is that you control it and will ultimately owned it and it will generate recurrent income stream for the duration of its tenure.

Further, Bonds is not a good hedge against inflation but property will be. And we are right now at the tip of a new secular trend of a bond bear market due to the expansion of monetary supply and interest rate rise.

For myself, I will not buy any more bonds and will instead direct the money into properties and equities.