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Fri12152017

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AllianzGI US High Yield Fund

Allianz Global Investors, one of the world’s largest asset management with AUM of USD2.04 trillion, is launching a new fund targeting ‘high yield’ bond. The fund manager is Douglas G. Forsyth. It is probably the first and only Singapore dollar hedged high yield fund. This will be a new set up fund because the original fund is US domiciled, i.e. not available to non-US citizens.

The fund aims to achieve the followings:

  1. Target regular (quarterly) fixed income payout of SGD 7.2 cents per annum for investors.

  2. Enjoy US high yield bond returns in Singapore Dollar. A weakening US dollar economic outlook would favour a Singapore dollar hedged fund.

  3. Equity-like returns with bond-like volatility. Historically, high yield bonds have outperformed equities during down years, while exhibiting equal to or better performance in the years leading out of a recession.

What is high-yield bonds? They are bonds issued by organizations such as US corporations, certain US banks, various foreign governments and foreign corporations, that do not qualify for ‘investment-grade’ ratings by the credit rating agencies: Moody’s Investors Service, Standard & Poor’s Rating Services and Fitch Ratings. In Moody’s rating it is rated as ‘Baa’ or lower; S&P it is ‘BBB’ or lower. It is also known as ‘junk bonds’.

Credit rating agencies evaluate issuers and assign ratings based on their opinions of the issuer’s ability to pay interest and principal as scheduled. Those issuers with a greater risk of not paying interest or principal in a timely manner are rated below investment grade. These issuers must pay a higher interest rate to attract investors to buy their bonds and to compensate them for the risks associated with investing in organizations of low credit quality.

The key risks underlying high yield bonds are:

  1. Credit risk which can be sub-divided into default risk and downgrade risk.

  2. Interest Rate Risk – Longer maturity bonds are more sensitive to interest rate movements.

  3. Liquidity Risk

  4. Economic Risk

  5. Company and Industry ‘event’ risk

High yield bonds will achieve good returns if the spread is contracting; likewise, it will perform badly if the spread is widening. The chart below illustrates the historical performance of the fund which is only available in US market:

AllianzUSHighYield

The fund performed badly in the year 2008 with lost of 20.41%; however, it did exceptionally well in 2009 with return of 45.59%, annualised return over 10 year period is 6.59%, 7.13% over 5-year period, 5.52% over 3-year period pre-tax return as of 31 May 2010, in US dollar term.

Source: MorngingStar

This implied that junk bonds act more like stocks than other bonds do. This is because their prices are closely tied to the corporations that issue them and their ability to service debts. It will have good years when equities have good years and bad years when equities have bad years.