Fixed income funds, especially fixed maturity products (FMP), have become one of the most popular investment vehicles this year.
In Hong Kong alone, five FMP products that were launched this year had net inflows of around $1.55bn from investors. The figure excludes seven other products that were launched later this year, as well as FMPs that were launched exclusively for private banking clients.
Hang Seng Bank believes that the trend will continue next year, with the bank already preparing to launch more FMPs in the first quarter, Belle Liang, the firm’s Hong Kong-based head of investment advisory, said recently.
Indosuez Wealth Management, which launched FMPs for client portfolios this year, also believes the trend will continue next year as clients expect that the global economy will continue to slow, according to Grizelda Lee, the firm’s Hong Kong-based head of discretionary portfolio management for Asia.
“It is a tough market. The [FMP] trend could potentially continue because of fear of recession, fear of a slowdown and fear of missing out,” she told FSA.
Most of the firm’s FMPs are structured in-house, although some of them were constructed by Amundi exclusively for Indosuez clients, according to Lee. (Both Indosuez Wealth and Amundi are part of the Credit Agricole group).
“It depends on the asset class. Recently, Amundi’s FMP was European-centric, whereas we concentrate a bit more on Asian credits.”
Lee expects that FMPs that fund managers will be launching next year will be slightly different.
“It will not be the same style as it was six months to a year ago. Currently, with spreads so tight, it will be hard to achieve the same kind of yield as before.
“Right now, the approach that fund managers are looking at is adding securities with higher risk, such as contingent convertible bonds (cocos), subordinate financing, corporate perpetuals and maybe some high yield bonds with short duration.
“The risks are a little bit different, maybe slightly heightened. It is natural though, because you are looking at the same kind of yield as before, and that is not achievable with the current environment. So you lower the quality to achieve that yield.”
Separately, Lee talked about the firm’s investment outlook for next year.
“The general environment does indicate that we are in the midst of a slowdown. Trade volumes in 2019, for example, have slowed to around 2% from 5% in 2017.”
Because of that, Lee recommends clients invest in more defensive assets, particularly in high-quality stocks and bonds.
On the equities side, quality stocks include those companies that have strong balance sheets and are paying out dividends consistently. Lee avoids companies that bump up their share prices by doing share buybacks.
She is also recommending clients who have a preference for growth stocks to start looking at more value names.
“There is a bit of a style rotation that we are persuading clients to take on if they still want to remain in equities.
“What we are trying to do is also be more tactical in 2020, in which we will be taking profits here and there and then going back in on dips, especially in the US, where we expect it to be more volatile because of the upcoming presidential elections.”
In Asia, Lee likes Singapore real estate investment trusts (Reits), as they provide investors with regular dividends and are less volatile than Asian equities.
On the fixed income front, Lee likes emerging market bonds, as they are yielding higher than their global counterparts.
Within emerging markets, Lee favours Asia over Latin America.
“I am not comfortable with the LatAm names, basically because the lack of governance is still quite strong there.”
Lee noted that external products only make up around 20% of client mandates, with the remaining invested in the firm’s in-house funds. The firm has about 100 in-house fund managers globally, she said.
“Each external fund or ETF allocation will only be at 2%-3% [of a portfolio], and we normally do not exceed 10%.
“When we use external funds, it is usually because we want a different strategy and we want to maybe branch out into something that we have expertise in,” she said, adding that most of these products are used tactically.
She said the firm is looking at more thematic funds. It has invested in a water and waste management fund, as well as a real estate product, but she declined to name the products.
(According to FE Fundinfo data, there is only one water and waste management fund, which is Fidelity’s Sustainable Water and Waste Fund).
The firm also uses ETFs, mostly managed by Amundi.
“ETFs are a really fluid way of managing mandates, as we can go in and out quickly. Recently we have been using a lot of US treasury, treasury inflation-protected securities (Tips) and gold ETFs,” she added.