FMPs maintain haven appeal

Asset Class in Focus

Aviva Investors is the latest fund manager to launch a fixed maturity product to meet investor demand for income and safety.

The FMP Series 1 Fund, which is available to accredited investors in Singapore, has a four-year tenor and will pay income to unit holders quarterly. The portfolio is managed by Aviva Investors’ fixed income team in Singapore, led by the firm’s Asia head of fixed income Adeline Ng, who is supported by Cheng Soon Tan and Alice Wu, according to a media release.

It is the first FMP venture by Aviva, and the UK-based fund manager is quite late to the game.

This year about a dozen managers have launched FMPs, raising at least $5bn, according to FE Analytics. The total figure is certainly larger, because the data has yet to be collected from recent issues by Eastspring, HSBC, Invesco and Amundi which are still raising money from investors.

The biggest funds were launched by Credit Suisse (CS) and UBS at the start of the year, which raised $1.8bn and $1.46bn respectively.

The CS 2023 product has a 50% weighting to China bonds, with the balance spread across a broad range of regions, including the Middle East and Africa. Three-quarters of the portfolio comprises financial and property bonds and the average credit rating is BBB- (the minimum to qualify as investment grade), according to fund’s fact sheet.

Its gross yield-to-maturity of 4.96%, and the the fund’s commitment to make quarterly income distributions for four years during a period of likely low and even declining interest rates is likely the reason for the fund’s popularity.

Yield plus safety sought

US treasury bond yields have fallen since the start of the year since the so-called “Powell-pivot” towards a dovish interest rate stance after several months of monetary tightening.

According to the US Department of Treasury website, the 2-year government bond yields 1.73%, the 3-year yields 1.67% and the 5-year yields 1.68%. Meanwhile, the average difference in yield between investment grade and non-investment grade bonds has fluctuated throughout this year, as investor sentiment has switched between optimism and pessimism about the outlook for the US – and hence global – economy.

An economic slowdown is typically negative for high yield bonds, and several strategist have advised their clients to raise allocations to investment grade, short duration bond issues to mitigate risks in an especially uncertain economic and geopolitical environment and amid volatile market conditions.

The fixed-term strategy of a FMP addresses some of these anxieties. It should help investors to lock in yields at current levels for a predetermined period, while a diversified pool of bonds cushions the impact of any defaults and the short tenor should reduce interest rate risk.

Moreover, FMPs typically deploy a “buy and maintain” approach to avoid re-investment risk, and that will also mean lower transaction costs and total expense ratios compared with traditional bond funds.

The Aviva offering claims to provide “a cost-efficient and well-diversified fixed income exposure through a basket of high-quality sovereign, quasi-sovereign and corporate bonds”, according to the media release.

It will also have a proportionally higher allocation to Asia ex-Japan bonds “given the region’s strong economic and corporate fundamentals”, despite the recent escalation of the China-US trade dispute and the sudden plunge in the value of the renminbi.

Aviva was unable to provide further details about its FMP before publication.

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