This article first appeared in Wealth, The Edge Malaysia Weekly on March 27, 2023 - April 2, 2023

Last year was challenging for most asset classes. For the most part, the key challenge was to keep the investment portfolios defensive while seeking to deliver income targets. The high inflationary pressure and corresponding interest rate hikes scenario were a bad recipe for bonds.

Yet, AmFunds Management Bhd (AmInvest) bagged the Best Bond Group (Malaysia) award at the Refinitiv Lipper Fund Awards 2023. AmFunds Management Bhd CEO Goh Wee Peng says the firm did not anticipate many trading opportunities and kept its exposure small on government bonds until bond yields became relatively more stable in the later part of the year.

“We focused on credit spreads that helped improve income generation and adopted a combined top-down (macroeconomic views, trends and themes) and bottom-up (sector, stock/credit selection, relative valuation) approach,” Goh says.

“We also deployed high-conviction structural and tactical strategies. We believe our asset allocation and active yield curve positioning have contributed to the funds’ good returns, and our robust bottom-up security selection has mitigated exposure to corporate bonds with weak credit metrics.”

She adds that it was more challenging to rebalance bond portfolios in 2022, as bond market liquidity declined by a third from 2021.

“With limited trading opportunities, we focused on income generation from corporate bonds with good credit spreads. We also remained nimbler with our unit trust funds as investors became more cautious, leading to some fund redemptions. We had to raise more cash in anticipation of these redemptions.

“We are generally light on cash for bond funds, as we anticipate the bond market to see a sustainable recovery before equities. We are expecting market liquidity to improve in 2023; hence, more trading opportunities are anticipated. We shall frequently rebalance our funds into higher yielding bonds when there is adequate supply.”

Given the general expectations of weakening economic growth, easing inflation and slowing interest rate hikes relative to last year, Goh says the firm forecasts that the bond market could see a better recovery this year.

“If the US Federal Reserve starts to pause the federal fund rate hikes by the first half of this year, it should likely influence other major central banks to take similar actions. In such a scenario, it is very possible that demand for bonds would return more aggressively.”

While AmInvest did not win any individual awards, its flagship fund AmDynamic Bond fund has outperformed its benchmark index, which is the BPAM Corporates All Bond Index, over the five-year period, as of Jan 31 this year.

According to its fund fact sheet, the fund generated a cumulative return of 27.62% in the past five years, beating its benchmark rate of 25.91%. The fund also yielded investors returns of 6.12% and 2.71% in the past three years and one year respectively.

Its top three holdings were UMWH Perpetual Sukuk Musharakah 6.35%- Tranche 1, Edra Energy Islamic Medium-Term Notes (IMTN) 6.710% and SPG IMTN 5.290%. They had an allocation rate of 13.77%, 6.69% and 5.98% respectively.

Its fund fact sheet also shows that the fund invested about 94% of its money in Malaysian corporate bonds and 2.48% in China corporate bonds. It has only a small portion of money, at 0.41% of the fund, invested in Malaysian government bonds.

In 2021, investment volatilities were mostly driven by uncertainty amid the pandemic, and while this concern continued to spill over into early 2022, investors quickly focused on inflationary pressures from multiple areas such as supply chain constraints, the Russia-Ukraine conflict, rising global interest rates and China’s zero Covid-19 policy.

Goh says there were no good catalysts for the market to rely on, although investors generally wanted to be optimistic. The persistent inflationary pressure, despite easing over the second half of 2022, did limit that optimism.

As inflation soared and interest rates rose aggressively last year, bond prices fell — the equity markets were not spared either. Goh says the expected negative correlation between equity and bond prices is not always valid. There have been instances in which both asset classes moved in the same direction.

“Between 2013 and 2016, the US equity and bond markets performed well because of excess liquidity in the financial system. In 2022, the equity and bond markets were both adversely affected by the anticipation of interest rate movements,” she says.

“As a long-only fund manager, the key consideration was to protect fund portfolio value by taking less duration risk while looking for investments that can generate income to mitigate market volatility.

“When there are adverse market conditions, it is important to assess the immediate upside and downside risks before determining the appropriate strategy and not just go with market sentiment.”

With the pandemic over, inflation starting to ease and China’s reopening, Goh says the risk of a global recession is likely to be low, especially in Asia, despite relatively high inflation pressures. European markets may face a higher possibility of a recession, owing to ongoing repercussions from the Russia-Ukraine conflict, which has affected energy prices.

“Asian equities and fixed income securities may perform better than other regions in 2023, although the economic growth may be lower than 2022’s economic recovery rate,” she says.

Looking closer to home and the formation of a new government under the leadership of Datuk Seri Anwar Ibrahim, Goh says it is still early days yet, as the new unity government was formed only four months ago. Even so, the Malaysian Anti-Corruption Commission’s (MACC) looking into multiple claims of corruption does seem to point in the right direction.

“The key deliverable for the new government that will determine its effectiveness is its short- and long-term economic policies,” she says.

“Other than mitigating wide-scale corruption, the government should also focus on economic concerns such as its high debt levels, imported inflation, labour shortage and brain drain.”

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