OCBC Global Bond Fund

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OCBC GLOBAL BOND FUND

He noted that implications of this would be negative for global bond markets. This is especially so for the short term, as 'carry' trades are being unwound. 'Carry' trades are transactions that borrow US dollars to fund investments in higher yielding asset classes including Asian bonds and junk bonds, causing the tightening of credits spreads. In the last month or so, yields have risen and credit spreads have widened due, in part, to the unwinding of such trades. However, the fund house feels the weakness in the bond markets is not a long term trend since it views inflation is not going to be a long term problem. Moreover, the health of emerging markets and corporate credits continues to be strong. Hou explains that in the next 3 to 6 months, OCBC Global Bond Fund (click here for the factsheet) will be taking a defensive position by staying short on duration within the global bond markets.

Absolute Returns With An Eye On Capital Preservation

OCBC Global Bond Fund is an absolute return unit trust with an aim to maximize total returns in the medium to long-term through investments in Singapore and international bonds, and other high quality interest rate securities. Although there is no target industry or sector, the investment process incorporates both the 'top-down' and 'bottom-up' approaches.

As the fund's objective is to deliver positive returns, the 1-month SGD Inter-bank bid rate was chosen as the bench mark for this fund. Launched in March 1991, the fund has a 14-year track record and has returned an annualized 5.1% in the past 10 years (as at end February 2005). In the 1-year, 2-year and 3-year periods ending 28 February 2005 the fund returned an annualized -0.8%, 3.5% and 6% respectively (figures are calculated using offer-to-bid prices, in SGD, with income reinvested).

The fund, which is registered under the CPF Investment Scheme for both the Ordinary (CPF-OA) and Special Accounts (CPF-SA), chooses not to invest in other emerging markets such as Latin America and Eastern Europe, due to higher economic and political risk, than developed G7 markets. The fund tends to be more focused on capital preservation. When compared with other absolute return global bond funds in the market, Hou says the OCBC Global Bond Fund is more conservative.

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Breakdown Of The Fund

According to the fund house, 19% of the fund is allocated in USD, 9% in Euro, 4% in Canadian Dollars, 4% in British Pound and 64% in SGD at the current moment (see sector breakdown below). This is partially due to the fund's defensive view of bond markets in the next 3 to 6 months. Besides being short on duration (about 3 years for the overall portfolio), the fund strategy for now involves having a lot of Singapore dollar exposure, and less in foreign currency to minimize exchange rate risk.

Although Asian currencies are appreciating, Hou feels it is unlikely to be of much advantage for the fund, to play on these currencies. "If you are SGD denominated fund you don't really benefit that much from Asian currencies appreciating, because the whole Asian bloc will probably go up in value. So I don't think there is a lot of mileage in this way. Unless some of these Asian currencies appreciate more than the Singapore dollar, which can happen, say, if the Ringgit un-pegs itself. But we think they will be dragging their feet to do that. So why be in Ringgit and get a low rate if that isn't going to happen now? Moreover, at the end of day, we are absolute return driven. So when we invest or take exposure, we know how to manage the down side."

He adds that there are also risks involved when incorporating foreign currency exposure to the fund. "We don't think the risk from holding bonds in Indonesia and Philippines is compensated adequately by the returns."

Less Than Half The Fund In SGD

Hou says that the portfolio position will be altered in line with developments in global bond markets. The fund may turn more positive on developed bond markets depending on how fast the yields go up. "Because at the end of the day, if there is little inflation than one should not be too worried. We are positioning it in a defensive way currently, but when the outlook in the US and Europe change, we will definitely put more into these markets."

Nonetheless, the fund does not intend to run the Singapore dollar component down to below 40%. He explains why. "The minimum is 40%, because if you have too much in foreign currency, you will bring in a lot of volatility to the fund. One way to reduce that volatility is to have a core exposure to SGD denominated bonds." Hou points out that that this does not mean the fund has to mostly invest into SGS Bonds (Singapore Government Securities). "Now there are a lot of SGD corporate papers. You can buy and sit on them and the yield is a lot higher than SGS bonds." The fund is currently skewed towards good quality corporate bonds than sovereign bonds in Singapore.

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Risks For Global Bond Markets

One key worry for bond markets is inflation. The Fed recently commented on "higher than expected inflation" triggering a rise in yields and strengthening of the US dollar. High oil prices are another concern. Besides hurting global economic growth, high oil prices could cause interest rates to increase at a faster and more aggressive pace. Hou says that the huge twin deficits faced by the US continues to be a risk. Should the US dollar go into a tailspin, interest rates would have to be increased aggressively to contain capital flight out of US currency. That in turn would cause bond prices to fall (interest rates and bond prices have an inverse relationship). However, the fund house does not think this risk is a big concern at this point.

Where Does This Fund Belong In An Investment Portfolio?

This fund is on our Fundsupermart Recommended list (click here to view our list of recommended funds), and can be part of a core portfolio for the long term investor. That's because global bond funds are considered low risk (with a Fundsupermart risk rating of 2; click here to view our risk rating system) and have lower volatility than equity funds. Thus they provide much needed stability through various market conditions. Although bond markets can go through cycles, the fluctuation of bond funds is much lower when compared to equity funds. Historically, bond funds seldom go through years when the overall return is negative. Most times global bond funds can provide a consistent positive return, although this may be significantly lower than what an equity fund can achieve in a rising market.

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The pie chart above illustrates where global bond funds belong in an overall portfolio (click here to find out how to start a portfolio from scratch). The percentage which should be allocated to global bond funds is dependent on an individual's risk profile. The diagram below shows the asset allocation for a balanced investor, and may not reflect an individual's risk/return profile. (To view investment portfolios tailored for different risk profiles, click here for our Fundsupermart Recommended portfolios).

'No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimers.'