Winner of Best Malaysia Bond Fund - Public Enterprises Bond Fund
Inception Date: 2012-03-20
Morningstar Rating (2020-02-29): ★★★★
Manager: Philip Chee Pin Wong
Q1) Can you highlight any major changes you made to the portfolio over the course of 2019? Were there any particular holding(s) or theme(s) that drove the fund’s performance for the year?
The domestic bond market performed well in 2019 as bond yields of 10- year Malaysian Government Securities (MGS) declined sharply by close to 80 basis points (bps) in tandem with the drop in global bond yields.
To capitalise on falling bond yields, Public Enterprises Bond Fund (PENTBF) adopted a longer duration strategy in 2019 and focused its investments on bond / sukuk with sound credit fundamentals, primarily in the infrastructure and banking sectors. The fund also benefitted from its holdings in Malaysian government bonds, which performed strongly during the year as bond yields compressed.
Our focus on fundamental analysis also enabled the fund to maintain the credit quality of its investments and to avoid bonds which were impacted by credit downgrades during the year.
The fund was rebalanced to navigate the impact of short-term volatility arising from the review on Malaysia’s eligibility to remain in FTSE Russell’s World Government Bond Index (WGBI) in April and September 2019, as well as Brexit uncertainty and the ongoing U.S.-China trade disputes throughout the year. The fund maintained its long duration portfolio towards end-2019 on the expectation that the monetary easing cycle would likely continue in 2020.
In summary, our investment philosophy of investing based on fundamental credit research and our active portfolio management strategy helped the fund to achieve its good performance, with a 1-year return of 8.22% and 3- year return of 20.55% as at end-2019.
Q2) What are some specific opportunities you have identified for 2020, and do you expect your 2019 outperformers to persist in 2020? What are the top risk factors that could impact your portfolio, and how are you positioned to mitigate these potential risks?
The low global interest rate environment as well as the accommodative domestic monetary policy is anticipated to underpin the domestic bond/sukuk market in 2020. In terms of risk, there could be short-term volatility in the bond/sukuk market ahead of FTSE Russell’s announcement of Malaysia’s status in the WGBI in September 2020. The sharp fall in oil prices following the Organization of the Petroleum Exporting Countries’ (OPEC) move to hike oil production despite weak global demand is also expected to affect the revenues of oil-exporting governments as well as oil & gas issuers.
PENTBF will continue looking for buying opportunities in bonds with strong credit fundamentals during periods of volatility in the domestic bond market.
Q3) In which areas do you think risk is over/understated with respect to (i) the outcome of the US Presidential election, (ii) persistently loose monetary policies by major economies, (iii) Coronavirus impact on global growth, and how are you expressing these views in your portfolio?
The domestic bond market started 2020 on a strong note, spurred by Bank Negara Malaysia’s (BNM) reduction of the Overnight Policy Rate (OPR) by 25 bps to 2.75% in January 2020 and falling global bond yields amid rising risk aversion following the Covid-19 outbreak.
The yields of 10-year Malaysian Government Securities (MGS) eased to a low of 2.78% as at 2 March 2020. There is a possibility of bond yields easing further in the event that the global growth outlook continues to weaken.
As there is limited room for the Malaysian government to spur growth through pump-priming measures given the relatively high government debt- to-GDP ratio, domestic monetary policies are envisaged to remain accommodative in order to sustain growth. After another 25 bps cut in the OPR to 2.50% on 3 March 2020, there is room for the OPR to be reduced further as the current level of 2.50% is still 50 bps above the all-time low of 2.00% during the Global Financial Crisis (GFC) in 2009.
The U.S. Federal Reserve made an unscheduled cut of 50 bps to lower the Federal Funds Rate (FFR) to 1.00%-1.25% on 3 March 2020, as the Covid-
19 outbreak poses evolving risks to economic activities. A coordinated global response in terms of monetary easing or expansionary fiscal policies could be anticipated as various central banks and finance officials pledged to support growth.
Given the above factors, we will continue to maintain a long duration bond portfolio for our bond funds.
Q4) How is your investment team organized? Have there been any changes to the investment team or structure over the past year? Do you anticipate adding to the team in the near future?
We currently have a team of 5 fixed income fund managers who are supported by a team of 6 credit analysts specialised within specific countries or sectors. There have been no major changes to our fixed income team over the past year. We evaluate our headcount on an ongoing basis to ensure that we have adequate resources to undertake the management of our funds, and will look to make additions when necessary.
Q5) Where do you feel that the investment team or the investment process can be improved upon in the future?
Members of our fixed income team seek to constantly improve themselves through continuous learning and development of their skill sets.
We also continuously look to upgrade and improve our workflow and processes as well as identify and employ best practices that will help to improve our efficiency as a team. To expand the scope of markets under our coverage and also to deepen our insights within the respective markets, we will continually look to strengthen the team with individuals who possess the appropriate skill sets.
View all 2020 Morningstar Fund Awards Malaysia articles here.