AmFunds navigates challenging bond market to win group award

This article first appeared in Wealth, The Edge Malaysia Weekly, on March 28, 2022 - April 03, 2022.
“The impact of such an event [the Russia-Ukraine conflict] is global as it has resulted in higher crude oil prices and supply chain disruptions, and further aggravates global inflation.” > Goh

“The impact of such an event [the Russia-Ukraine conflict] is global as it has resulted in higher crude oil prices and supply chain disruptions, and further aggravates global inflation.” > Goh

-A +A

Last year was not an easy one for bond fund managers to navigate, given the rising interest rate environment. However, AmFunds Management Bhd’s (AmFunds) fund managers managed to find opportunities, leading to the firm winning the Best Bond Group (Provident) award and three other awards at the Refinitiv Lipper Fund Awards 2022.

This is the third consecutive year that AmFunds has clinched the group award. AmDynamic Bond won the awards for Best Bond MYR (Provident) in the three-, five- and 10-year categories.

“We are proud to be able to win an award in the midst of the rising risk environment brought on by the challenging bond markets in 2021. This achievement reflects very well on the investment team’s strategy over the review period,” says Wong Yew Joe, chief investment officer of AmFunds Management.

The biggest challenge that the team faced last year was to manage the risk level of the portfolio as yields rose quickly in bond markets, especially in the first half of 2021. Rising yields have a direct adverse impact on bond returns.

“Malaysian government bond yields rose up to 100 basis points (bps) in 2021. We had to trim our portfolio duration and switch our exposure from government bonds to more corporate bonds,” says Wong.

The team diversified its portfolio into more local and regional corporate bonds.

Other risks were also present in the market last year, including the spread of the more severe Delta variant of Covid-19 across the world. In the face of greater market volatility and potential fund redemptions, the investment team generally maintained a range of 5% to 15% of its net asset value in cash.

“The key strategy was to stay defensive but still keep invested enough to generate sufficient income,” says Wong. “The lower trading volume in the market last year resulted in fewer trading opportunities, hence, we had to focus more on generating income from bond coupons.”

AmDynamic Bond is a mid- to long-term bond fund with potentially higher levels of income and risk, according to its product highlight sheet. It invests primarily in bonds by active portfolio trading. The fund’s investment philosophy comprises a combination of top-down and bottom-up approaches, says Wong.

“The lower trading volume in the market last year resulted in fewer trading opportunities, hence, we had to focus more on generating income from bond coupons.” > Wong

“We deploy high conviction structural and tactical strategies when managing the fund. We believe our asset allocation and active yield curve positioning have contributed to the funds’ good returns, and our robust bottom-up security selection mitigates exposure to weak credits.”

The outlook for bonds this year will continue to be heavily influenced by the interest rate decisions of central banks, especially those in developed markets. Wong believes there is now a move away from the transitory inflation narrative. In fact, US Federal Reserve chairman Jerome Powell has observed that inflation will likely continue to rise this year.

The market appears to have priced in multiple rate hikes by the Fed, Bank of England and European Central Bank, says Wong. As for Malaysia, he believes that the policy rate decision will largely depend on the speed of the country’s economic recovery.

“We expect a 25bps to 50bps hike in the overnight policy rate (OPR) in 2022, provided that the macroeconomic data continues to improve to a level consistent with Bank Negara Malaysia’s 5.5% to 6.5% GDP growth outlook for the year,” he adds.

“The front end of the Malaysia Government Securities or Government Investment Issues yield curve has already priced in a sufficient policy rate normalisation buffer and should be relatively stable compared with long-end yields, which will still be influenced by the trajectory of global rates.”

Given his team’s assumption of a gradual economic recovery, Wong expects corporate bonds to outperform government securities. “For the fund, we are likely to maintain the fund’s strategy around a belly duration and [on] more corporate bonds,” he says.

Overall, the risks of inflation, a potential general election and the pandemic, driven by Omicron and the possibility of new variants, will remain in 2022. Geopolitical tensions such as the Russian-Ukraine war have also added uncertainty to the financial markets.

“The impact of such an event is global as it has resulted in higher crude oil prices and supply chain disruptions, further aggravating global inflation,” says Goh Wee Peng, CEO of AmFunds Management.

Therefore, 2022 is potentially another year of volatility, especially in the first half of the year. “The market is pricing in the risks mentioned earlier, but it may not be done yet. Barring any unforeseen circumstances, when the dust settles, we may see risk assets like equities having better upside than lower-risk assets such as bonds,” she adds.

In terms of products, AmFunds launched three funds with exposure to global equities last year, namely the Sustainable Series – Positive Change Fund, Sustainable Series – Climate Tech Fund and Hong Kong Tech Index Fund. The first two funds are part of its Sustainable Series funds that focus on ESG (environmental, social and corporate governance) factors and sustainable and responsible investing.

“In line with industry trends and growing investor interest, these two funds invest in companies that adopt positive social impact and climate technology respectively,” says Goh.