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Schroder Asian Investment Grade Credit Fund

Schroder Asian Premium Bond will be renamed as Schroder Asian Investment Grade Credit effective 2012-11-01.  It is probably the only pure Asian investment grade corporate bond fund in Singapore approved by CPF-OA and SA.  Unlike other Singapore bond funds such as United SGD Fund etc, which is a combination of government and corporate bond, this Fund is pure corporate bond with average grade of A-.

The investment objective of the Fund is to provide a return of capital growth and income primarily through investment in a portfolio of investment grade (i.e. at or greater than BBB-) debt securities denominated in local and foreign currencies, issued by governments, government agencies, supra-national and corporate borrowers across Asia (ex Japan) debt markets. The Fund is also permitted to make tactical investments (up to 30% maximum including cash) in G7 Government bonds for diversification and capital preservation purposes.  The current fund size as of 2012-09-30 is S$93.1 M.

The fund was launched in 2007-02-09.  Prior to 2009-07-01, the fund manager managed the portfolio actively and did not hedge the portfolio to Singapore dollar.  After 2009-07-01, the Fund was restructured with a “buy-and-hold” strategy focused on investing in good quality investment grade bonds with the majority of positions having an underlying maturity of less than 7 years. Essentially the Fund Manager focus on ‘buy-and-hold’, hedge back to Singapore dollar and adopt flexibility to hedge its portfolio duration by the use of interest rate forwards or buy US dollar treasuries. 

What is the implication of the change in the strategy?  ‘Buy-and-Hold’ would reduce expense ratio, hedging back to Singapore dollar would reduce the currency risk exposure as the fund is exposed to foreign currency risk.  The top 3 countries that the Fund exposed to are:  Korea, China and Hong Kong.  The underlying asset could be in the respective local currencies or US dollar.  By hedging back to Singapore dollar, it essentially attempted to eliminate the currency risk.  The ‘flexibility to hedge is position duration’ is an important strategically change – as a matter of fact, bond yield is inverse to interest rate.  If the market were to hike the interest rate, bonds of longer duration are likely to be badly affected.  Hence, the ability of hedge the portfolio duration would of significant important to the portfolio performance moving forward.

The performance of the fund since its restructuring is shown below:

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Source:  iFast Financial Pte Ltd

It has achieved an absolute return of 22.47% or annualised return of 6.26%, outperformed the CPF-OA of 3.5% yield (2.5%+1%).  The fund will attempt to payout 0.875% quarterly (3.5% p.a.) from 2013-01-01.

The return is basically in line with the overall bonds performance as Bonds as a whole has been doing well due to the huge  demand for yield play.  For instance, on  2012-09-24, 2012-10-16 and 2012-11-04,  Financial Times published article titled “Asian Bond Issuance hits New Record High”,  “Fund Managers warn on Corporate Bonds’ and “Record US Sales for LatAm Corporate Bonds” respectively.  When there is a huge demand, prices will undoubtedly go up.