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United SGD Beats Peers With Perpetual Bond

United SGD Fund with AUM of S$435 million, managed by UOB Asset Management Ltd with AUM of $15.5 billion, a unit of United Overseas Bank Ltd, beats most peers with return of 5.1% as of 2012-08-29 by buying perpetual bonds and investing 70% of its money overseas as rates on bank deposits and sovereign yields approach zero.

The picks helped it to outperform its rivals including investment vehicles managed by Fullerton Fund Management Co. and Nikko Asset Management Ltd.  The S$859 million Short-term Interest Rate Fund managed by Fullerton Fund Management earned 4.5% this year, while the S$233 million Nikko AM Short Term Bond fund run at Nikko Asset Management returned 3.5%, according to data compiled by Bloomberg. Both are Singapore dollar funds that invest in securities due within three years.

United SGD has seven perpetual bonds among about 50 securities in its portfolio as of 2012-06-30.  United SGD Fund was ranked the top local currency bond fund in 2010 and 2011 by Lipper Inc based on 3 and 5 year performance.

Joyce Tan, co-head of Asian fixed-income investment at UOB Asset Management, says “We want to diversify across countries, sectors and structures, and perpetual bonds are an added spice to dish”, however, “it’s still a short-term bond fund.”

Tan, 38, who joined UOB in 2007 after a stint at ING Investment Management, said her fund started buying perpetual debt in 2009, and invests in those that are callable within three years. The fund’s current average duration is two years, she said.

She invested 35% of the fund’s assets in debt sold by Singapore-based companies as of the end of July, the largest portion by geography. The holdings include the 8.5 % bond due in 2013 sold by Noble Group Ltd., Asia’s biggest commodity supplier, and the 3.83 % bond maturing in 2014 issued by property developer Savu Investments Ltd.  Its single largest holding is Westpac’s perpetual debt, which may be called at par on 2013-09-30.

Benedict Koh, a Finance Professor at Lee Kong Chian School of Business of Singapore Management University said perpetual bonds are riskier than fixed-term bonds or money-market instruments as there is no repayment of capital unless they called. Volatility to interest-rate swings is “very high,” especially when rates are projected to rise in the long run.

The chart below compares different Singapore dollar bond funds with United SGD Fund:


Reference:  Bloomber, David Yong, 2012-08-31, “UOB Fund Beats Peers With Perpetual Debt: Southeast Asia”

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