US interest rate cuts loom in 2024, but due to residual inflationary pressures, levels are unlikely to fall to pre-pandemic lows. In the fourth of our 5-part Higher-for-Longer series, we look at how the United SGD Fund offers investors the potential for both steady monthly income and good capital gains
The rise of reinvestment risk
Cash was a star performer in 2022 and 2023 as interest rates climbed and other asset classes underperformed. Many investors flocked to cash to earn decent returns with little risk.
But the US Fed is likely done hiking interest rates, and is set to embark on rate cuts instead. Economic data shows inflation is moderating and the labour market is gradually cooling, signs that there is room for the Fed to start loosening its monetary policy in 2024.
This means that currently high cash rates could fall in 2024, and reinvestment risk – i.e. the risk that investors are forced to reinvest their money at a lower interest rate because they failed to lock in higher levels – could rise.
Cuts on the cards
Typically, investors mitigate this risk is by locking in today’s higher yields for a longer period using bonds. After years of paltry yields amid low or even negative interest rates post global financial crisis (GFC), bonds now offer compelling income for investors with yields at levels not seen in 15 years.
Figure 1: US 2Y and 10Y Treasury yields (%), 2008 - 2023
Source: Bloomberg, UOBAM, 13 Dec 2023
On top of locking in attractive yields, investors stand to benefit from higher bond prices if interest rates start to fall. Over the past weeks, it is this expectation of US rate cuts that has caused bonds to rally. As a result, bond returns across all sectors significantly outperformed cash in November and year-to-date.
Figure 2: Bonds vs Cash returns
Nov 2023 (%) | Jan – Nov, 2023 (%) | |
Cash | 0.32 | 3.48 |
Global investment grade (IG) bonds | 4.18 | 4.18 |
Asia IG bonds | 2.57 | 3.58 |
Global high yield bonds | 4.64 | 8.79 |
Source: Bloomberg, UOBAM, Nov 2023. Global IG bonds: Barclays Global Corporate Aggregate Index; Asia IG bonds: JACI Investment Grade Index; Global high yield bonds: Barclays Global High Yield Index
This bond price appreciation is expected to continue into 2024. Following the Fed’s recent December meeting, the projections from the Statement of Economic Projections (SEP) "dot-plot" show a 75-basis-point cut in 2024, although there is still debate on the exact timing of these cuts.
The United SGD Fund
Multi-maturity portfolio
The United SGD Fund (the “Fund”) invests in high-quality, short duration investment grade bonds. It uses a laddered strategy to smoothen the impact of fluctuating interest rates and enhance overall returns.
This works by deliberately investing in bonds of different maturities. So when interest rates rise, the Fund’s laddered portfolio enables proceeds from matured bonds to be reinvested into new, longer maturity bonds at higher interest rates.
In the 2022 – 2023 period, when rates were rising, this strategy helped boost the Fund’s weighted average yield to maturity (YTM) from 2.10 percent as of 31 Jan 2022, to 4.82 percent as of 31 Oct 20231.
In the coming few years, when interest rates are expected to fall, a laddered strategy can help to lock in bond yields at previously higher rates. That’s because only a portion of the portfolio will mature in any given year, therefore reducing reinvestment risk.
While laddered strategies are known to work well in volatile interest rate environments, they are difficult to achieve without collective instruments such as mutual funds, given the capital required to invest in a multi-maturity bond portfolio.
Income and stability
The Fund currently provides an annualised dividend yield of 5.0 percent2, paid out monthly (United SGD Fund Class S SGD Dist). It does this by focusing on bond issuances from corporates that have good access to capital markets, resilient balance sheets, and defensive business models.
As a result, the Fund is less vulnerable to drawdowns during periods of market volatility and has delivered positive calendar year returns in 22 out of the Fund’s 24 years of existence.
Figure 3: United SGD Fund calendar year returns (%) since inception
Source: UOBAM, as of 31 Oct 2023. Performance is net of fees and is based on United SGD Fund Class A (Acc) SGD, in SGD terms, on a NAV basis, with dividends and distributions reinvested, if any. Past performance is not necessarily indicative of future performance.
Going forward, as we move into a new era of structurally higher-for-longer inflationary pressures, we would expect to interest rates to fall but still remain above pre-pandemic levels. This means the United SGD Fund offers the best of both worlds – inflation-beating monthly income plus the potential for price appreciation. The combination makes the Fund an attractive proposition for all investors, regardless whether they are seeking income in the short-term, or looking to build a nest egg over the longer term.
Fund Details
United SGD Fund, as of 31 Oct 2023 | |
Investment objective | Invest substantially all its assets in money market and short term interest bearing debt instruments and bank deposits with the objective of achieving a yield enhancement over Singapore dollar deposits. |
Distribution policy | Class A SGD (Dist): Dividend rate of 4.0% per annum, paid out monthly* Class S SGD (Dist): Dividend rate of 5.0% per annum, paid out monthly* *Distributions are not guaranteed. Distributions may be made out of income, capital gains and/or capital. This relates to the disclosed distribution policy as set out in the Fund’s prospectus |
Country allocation (%) | China: 20.9 Singapore: 18.6 South Korea: 12.1 Hong Kong: 10.4 India: 6.6 Japan: 5.4 UK: 4.2 Australia: 4.1 Others: 17.85 |
Top 5 sector allocation (%) | Financials: 39.4 Utilities: 12.7 Industrials: 9.1 Consumer Discretionary: 8.8 Materials: 6.6 |
Top 5 holdings (%) | Mizuho Fin Grp Cayman 3 Company 03/24 4.6: 2.8 Sumitomo Mitsui Financial 04/24 4.436: 2.6 China Huadian Overseas Company Var: 2.3 Misc Capital Two Labuan Company 04/25 3.625: 2.2 MAS Bill Bills 12/23 0.00000: 2.2 |
Fund classes available3 | Class A SGD Acc; Class A SGD Dist Class A USD Acc (Hedged); Class A USD Dist (Hedged) Class B SGD Acc Class D SGD Acc Class S SGD Dist Class S USD Dist (Hedged) |
Management fee | Class B SGD Acc and Class D SGD Acc: 0.33% p.a. All other Classes: 0.63% p.a. |
Subscription fee | Up to 2% p.a. |
Minimum subscription / trading size | Class A/S: S$1000/US$1000 (initial); S$500/US$500 (subsequent) Class B: S$500,000 (initial); S$100,000 (subsequent) Class D: S$1,000 (initial); S$500 (subsequent) |
1Source: UOBAM, as of 31 Oct 2023
2Source: UOBAM, Nov 2023. Distributions (in SGD) are not guaranteed. Distributions may be made out of income, capital gains and/or capital. This relates to the disclosed distribution policy as set out in the Fund’s prospectus.
3Investors should refer to the Fund’s prospectus for more details on the different classes available. Please check with our distributors on the availability of the Fund Classes.
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