The prices of bonds issued by mainland China property developers plunged in 2021 over fears that they would not be able to meet their financial obligations, amid falling property sales and a government-induced credit crunch.
Unsurprisingly, the bottom five performing fixed income funds last year are all within the Asia Pacific sector, many of which invested in offshore China high yield bonds.
Co-managed by Hayden Briscoe and Michael Fleisch, UBS’s China High Yield Bond Fund was the worst performer in 2021, with a loss of 27.17%, according to FE fundinfo data.
As of the end of November, the $218.59m fund allocated 77.8% of its assets to US dollar-denominated China credit, with a 62.9% exposure to the real estate sector.
Another fund manager at UBS, Ross Dilkes, left the asset manager after his Asian High Yield Fund plunged 16% in 11 months. The fund added an extra 25% of units of now-defaulted Evergrande bonds year-to-May last year.
The other four worst performing funds in 2021 were the Haitong Asian High Yield Bond Fund, the BOCHK All Weather China High Yield Bond Fund, the Value Partners Greater China High Yield Income Fund, and the Allianz Dynamic Asian High Yield Bond Fund, which posted cumulative losses of between 19.5% and 24.94%. All suffered because of the turmoil in the Chinese real estate sector
Beijing imposed “three red lines” policy in August 2020 for property developers in an attempt to contain growing debt levels, rising land prices and booming sales.
The thresholds include a liability-to-asset ratio excluding advance receipts of less than 70%, net gearing ratio of less than 100% and cash-to-short-term debt ratio of more than one.
Companies which failed to comply with the regulations would face limits on the extent which they can grow debt, which makes them more difficult to refinance.
Since the policy was introduced, China Fortune Land, Fantasia, Kaisa Group were among the other debt-laden property developers that have defaulted on their debts.
Bottom five performing fixed income funds in 2021
| Fund | Performance | Volatility | Info Ratio |
| UBS (HK) China High Yield Bond (USD) | -27.17% | 19.59% | -1.42 |
| Haitong Asian High Yield Bond | -24.94% | 19.29% | -1.21 |
| BOCHK All Weather China High Yield Bond | -22.74% | 17.05% | -1.59 |
| Value Partners Greater China High Yield Income | -22.44% | 8.90% | -2.65 |
| Allianz Dynamic Asian High Yield Bond | -19.50% | 11.69% | -1.86 |
While offshore Chinese high yield bonds suffered a year of loss, onshore China investment grade bonds showed resilience.
The top three performing fixed income fund last year, the CCB Principal Dual Income Bond Fund, the Schroder China Fixed Income Fund and the CMS China Opportunities Flexifund all invest in debt securities issued or listed in China.
Since the covid-19 pandemic began, the People’s Bank of China (PBOC) has maintained a tighter monetary and fiscal stance by cutting the 7-day reverse repo rate by only 30 bps to 2.2%.
The Chinese central bank has also refrained from quantitative easing, providing the capacity or policy room to ease monetary policy at a later stage.
These decisions have helped Chinese government bonds to generate higher yields compared with other global government bonds.
The CCB fund is the only fund that generated a double-digit return in 2021, with a cumulative return of 14.79% in US dollar terms.
Its top five bond holdings included 50.2% of its AUM in a single China government bond, and 10.9% in another government bond. In total, the $33.8m fund had 66.2% of its asset allocated to national bonds and 10.1% to financial bonds as of the end of October.
Ranking second was the Schroder China Fixed Income Fund with a cumulative return of 8.26%. Nine of the top 10 holdings of the $401m fund are China government bonds, and in total, the product invests almost 70% of its AUM in Chinese treasuries, according to the fund factsheet.
The CMS China Opportunities Flexifund allocates 71.6% of its AUM in bond and fixed income funds and has 25% in cash.
The largest holding is in China Development Bank (10.9%), followed by a listed money market fund managed by Huabao WP Fund Management (10.4%).
Amid rising inflation, funds which invest in floating rate bonds or fixed rate bonds with short durations also stood out from the rest of the pack.
Posting a cumulative return of 7.67%, the Franklin Floating Rate PLC fund invests primarily in senior secured corporate loans and corporate debt securities with floating interest rates with an average duration of 0.78 years.
It mainly invests in B+ notes especially in the technology (15.33%) and healthcare (13.11%) sectors.
With diversified holdings, AB Global High Yield Portfolio is the only junk bond fund which made it to the top five list.
The fund invests 62.7% of its AUM in US bonds, but its largest holding is 0.57% in a South African government bond. Although being the first country to identify the Omicron coronavirus variant, South Africa’s sovereign fixed income has one of the steepest curves and highest real yields within emerging markets.
Top five performing fixed income funds in 2021
| Fund | Return | Volatility | Information Ratio |
| CCB Principal Dual Income Bond | 14.79% | 9.31% | 0.95 |
| Schroder China Fixed Income | 8.26% | 3.30% | 2.62 |
| CMS China Opportunities Flexifund | 7.82% | 6.21% | 0.69 |
| Franklin Floating Rate PLC | 7.67% | 2.04% | 3.72 |
| AB Global High Yield Portfolio | 7.35% | 4.96% | 1.26 |
Sub-sector performance
Reversing a positive year in 2020, only three fixed income sectors recorded positive returns last year. Renminbi fixed income funds led the pack with an average return of 2.51%.
Global high yield (2.34%) and US dollar high yield (0.95%) bond funds are the second and third best performing sectors of the year.
Despite US inflation hitting a 40-year high, the 10-year treasury yield kept below 2%, so real bond yields were negative. US high yield credit, which has less interest-rate sensitivity than government bonds, were among the top performers in 2021, though gains were modest.
Top three performing fixed income sectors in 2021
| Sector | Return |
| RMB | 2.51% |
| Global High Yield | 2.34% |
| US Dollar High Yield | 0.95% |
On the other hand, all other sectors reported negative returns for 2021 from -1.6% to -8.23%, especially those in Asia Pacific and Europe.
Some fixed income fund managers in the Asian Pacific sector increased exposure to the Chinese property developer in the middle of the year, despite the unravelling crisis in the sector.
Morningstar direct data showed major fund managers bet on Beijing to bail out those indebted companies out, and accumulated more units of Evergrande bonds over the past year.
Meanwhile, Euro-denominated investment grade and high yield bonds were also laggards last year.
Bottom three performing fixed income sectors in 2021
| Sector | Return |
| Asia Pacific | -8.23% |
| Europe | -7.69% |
| Euro High Yield | -5.28% |
