FMPs retain appeal in Asia

Fund distributors in Asia also favour FMPs, because they have short, fixed tenures, and investors can typically get back their principal plus all income distributions, according to Cerulli Associates, a Boston-based consultancy.

“Hence, it is easier to manage clients’ expectations… especially amid periods of heightened market volatility,” said Shannen Wong, co-author of the firm’s September Asian Monthly Products Trends Edge.

FMPs gained popularity among global investors last year on expectations of falling US interest rates and bond yields, precipitating a search for products that could generate a reliable source of income for a specified time period.

Many asset managers offered products with mandates ranging across the risk spectrum, including US investment grade bonds, global high yield, Asian credit and emerging market debt.

The funds typically deploy a “buy-and-maintain” approach to avoid re-investment risk, and aim to provide future cash flow security, offer low volatility and mitigate interest rate risk. But income, returns and capital are usually neither guaranteed nor protected.

About 15 FMPs incepted from 1 January 2019 to the end of January 2020, and available to Hong Kong or Singapore investors, gathered assets of $500m or more, FE Fundinfo data shows.

The largest were a FMP from Credit Suisse, which attracted slightly more than $2bn in assets 13 months after launch, and a $1.5bn UBS FMP.

Although the pace of issuance has not been so frenetic this year, and product sizes less substantial, several fund houses have gone ahead with FMP launches this year, including Invesco, Amundi, EFGAM, Aberdeen Standard, Fubon.

In addition, private banks in Asia continue to see strong demand for their recently launched FMPs from their clients, according to Cerulli. For instance, in July UBS Global Wealth Management reportedly raised $350m for an FMP from private banking clients in Asia, and Julius Baer attracted $867m to its fixed maturity 2024 Asia strategy a month earlier.

Higher risks

However, the FMP bandwagon has faced headwinds this year as a result of the coronavirus induced economic slowdown.

The biggest concern for investors is the prospect of a pick-up in corporate bond defaults. A global recession, poor market liquidity and surging borrowing costs might threaten corporate solvency and cash flow.

“A few FMPs have already been affected by bond defaults in China, and this could undermine confidence in such products,” said Wong.

“This is rather worrying, given that a significant number of FMPs rolled out since 2019 in Hong Kong invest in US dollar-denominated Asian bonds, which are heavily dominated by Chinese issuers,” she said.

Some managers and distributors are also anxious that the prolonged low-interest-environment will put pressure on FMPs’ returns, while the uncertainty from Covid-19 could potentially restrict fundraising for new FMP launches. There could be concerns that these products might fetch lower yields this year compared to last year,” said Wong.

As a consequence,  a few FMP managers have moved down the credit curve, buying lower rated bonds or securities with durations longer than those of the funds, in order to generate better returns, she noted.

Managers have also been looking to be more innovative in their new FMP launches, with some incorporating ESG features, such as BNP Paribas this month, shortening or stretching their fixed-maturity period, and or extending their risk exposures.

“To tap the demand for FMPs in Asia, managers must strive to be more innovative in developing new solutions that suit current market conditions and be able to differentiate their offerings in a competitive marketplace,” said Wong.

Nevertheless, Cerulli believes that FMPs will continue to be featured on managers’ and distributors’ product promotion plans in the long-term, “due to Asian investors’ strong preference for products that can provide them with stable income streams.”

Top 5 Hong Kong and Singapore fixed income funds by net new flows, July 2020 YTD

Hong Kong:

Sources: Cerulli Associates, Morningstar Direct

Singapore:

Source: Cerulli Associates, Morningstar Direct