Interest rates will be more stable in 2024. This means funds investing in higher quality corporate bonds are set to enjoy both good income and price appreciation potential
2023 will be remembered as the year many economists got their recession calls wrong. Although it was widely feared that the US Fed’s interest rate hikes would send the economy into a recession, consumer spending and the labour market remained resilient.
Going into 2024, we think a recession looks unlikely given easing inflation and still-low unemployment. But consumers’ excess savings acquired during the pandemic is now dwindling, and this is expected to take a toll on the economy. The World Bank has forecast US GDP growth this year to slow to 1.6 percent from 2.5 percent in 2023.
Against this backdrop of slower but still-positive economic expansion, higher quality corporate bonds and bond funds have several advantages. Their yields are still relatively attractive and better corporate fundamentals are causing spreads to tighten. Given that US-domiciled higher-yield corporate bond are yielding 5 - 6 percent, when added to potential capital gains, these assets have the potential to match equity returns with far less volatility.
Higher grade
The United Sustainable Credit Income Fund (the “Fund”) invests mainly in higher grade corporate bonds. About 60 percent of the portfolio is invested in investment grade bonds and 30 percent in the better-rated high yield bond segment, primarily those rated BB. This is to provide diversification and enhanced yield potential. Meanwhile, the default risk of BB rated bonds is not excessively high given that the average one-year default rate stands at less than 1.0 percent1.
Fig 1: Yield comparison: BB-rated vs IG bonds
Source: Bloomberg, as of 16 Jan 2024
Taken together, the average credit quality of the Fund is BAA1/BAA2 – equivalent to the BBB+/BBB rating by S&P – which falls within the investment grade bond category. This overall high quality means the Fund offers some protection, even in a recessionary market environment.
Income-generating
The Fund currently provides an annualised dividend yield of 5.0 percent2, paid out monthly (Class A SGD Dis (Hedged). To achieve this, the Fund’s portfolio managers carefully pick individual bonds across the global corporate credit market, diversified across ratings, sectors or regions.
This selection is not determined by any benchmark, and is designed to generate stable, strong recurring income for investors throughout market cycles. Furthermore, given impending rate cuts, the Fund’s duration of 5 years enables higher yields to be locked in for longer.
Total returns
The Fund delivered full-year returns of 5.56 percent in 2023, largely driven by interest rate cut expectations and tighter credit spreads.
Fig 2: Indexed fund performance, 31 Dec 2022 – 31 Dec 2023
Source: Morningstar, as of 31 Dec 2023, based on Class A SGD Dist (Hedged) share class, SGD basis, with dividends and distributions reinvested, if any. Fund performance is calculated on a NAV to NAV basis
Well diversified
The Fund has a significant exposure to the financial sector, which makes up 46 percent of its sector allocation. Reflecting this weighting, the Fund’s top three holdings include financial stocks such as Deutsche Bank, CaixaBank and Banco de Sabadell.
Industrials, Treasuries, and Agencies are the Fund’s next three biggest sector allocations, comprising 38 percent of its portfolio.
In terms of geographical allocation, the Fund’s largest weights are in bonds issued by US and UK corporates. Bonds from European corporates including German, Dutch, French and Spanish also feature heavily.
Sustainability and resilience
To achieve better resilience, the Fund applies a proprietary measurement framework to quantify the underlying bond issuers’ contributions to the 17 United Nations Sustainable Development Goals (SDGs). This helps the Fund avoid future losers to mitigate risk and enhance long-term returns.
Fund Details
| United Sustainable Credit Income Fund, as of 31 Dec 2023 | |
| Investment objective | To achieve income with the prospect of capital growth from a multi-sector portfolio of fixed income instruments. |
| Distribution policy | Class A SGD Dist (Hedged): 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 |
| Top 5 country allocation (%) | UK: 12.48 US: 11.18 Germany: 9.50 Netherlands: 8.08 France: 7.96 |
| Top 5 sector allocation (%) | Financials: 46.01 Industrials: 28.49 Treasuries: 5.14 Agencies: 4.51 Utilities: 3.36 |
| Top 5 holdings (%) | Deutsche Bank: 1.59 Caixa Bank SA: 1.49 Banco De Sabadell SA: 1.40 Volkswagen Financial Services NV: 1.40 Nationwide Building Society: 1.39 |
| Fund classes available3 | Class A SGD Acc (Hedged); Class A SGD Dist (Hedged) Class B SGD Acc (Hedged) Class A USD Acc; Class A USD Dist |
| Management fee | Currently 1.15% p.a., maximum 2.0% p.a. |
| Subscription fee | Currently 3%, maximum 5% |
| Minimum subscription / trading size | Class A: S$1000/US$1000 (initial); S$500/US$500 (subsequent) Class B: S$500,000 (initial); S$100,000 (subsequent) |
1Source: S&P Global Ratings Credit Research & Insights and S&P Global Market Intelligence’s CreditPro, June 2023
2Distributions (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.
If you are interested in investment opportunities related to the theme covered in this article, here is a UOB Asset Management Fund to consider:
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Distributions will be made in respect of the Distribution Classes of the Fund. Distributions are based on the NAV per unit of the relevant Distribution Class as at the last business day of the month. The making of distributions is at the absolute discretion of UOBAM and that distributions are not guaranteed. The making of any distribution shall not be taken to imply that further distributions will be made. The Managers reserve the right to vary the frequency and/or amount of distributions. Distributions from a fund may be made out of income and/or capital gains and (if income and/or capital gains are insufficient) out of capital. Investors should also note that the declaration and/or payment of distributions (whether out of capital or otherwise) may have the effect of lowering the net asset value (NAV) of the relevant fund. Moreover, distributions out of capital may amount to a return of part of your original investment and may result in reduced future returns. Please refer to the Fund’s prospectus for more information.
This document is for general information only. It does not constitute an offer or solicitation to deal in units in the Fund (“Units”) or investment advice or recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. The information is based on certain assumptions, information and conditions available as at the date of this document and may be subject to change at any time without notice. No representation or promise as to the performance of the Fund or the return on your investment is made. Past performance of the Fund or UOB Asset Management Ltd (“UOBAM”) and any past performance, prediction, projection or forecast of the economic trends or securities market are not necessarily indicative of the future or likely performance of the Fund or UOBAM. The value of Units and the income from them, if any, may fall as well as rise, and is likely to have high volatility due to the investment policies and/or portfolio management techniques employed by the Fund. Investments in Units involve risks, including the possible loss of the principal amount invested, and are not obligations of, deposits in, or guaranteed or insured by United Overseas Bank Limited (“UOB”), UOBAM, or any of their subsidiary, associate or affiliate (“UOB Group”) or distributors of the Fund. The Fund may use or invest in financial derivative instruments and you should be aware of the risks associated with investments in financial derivative instruments which are described in the Fund's prospectus. The UOB Group may have interests in the Units and may also perform or seek to perform brokering and other investment or securities-related services for the Fund. Investors should read the Fund’s prospectus, which is available and may be obtained from UOBAM or any of its appointed agents or distributors, before investing. You may wish to seek advice from a financial adviser before making a commitment to invest in any Units, and in the event that you choose not to do so, you should consider carefully whether the Fund is suitable for you. Applications for Units must be made on the application forms accompanying the Fund’s prospectus.
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