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TO CHONG Jiun Yeh, who led UOB Asset Management (UOBAM)'s fixed income team to a significant industry milestone this year, success in fixed income management is achieved by an astute process of managing risk and conducting fundamental research.
"We're investing in fixed income. Defaults can significantly affect fund performance, so it's important to manage downside risk to ensure superior performance over time," says Mr Chong, UOBAM's Chief Investment Officer of Fixed Income and Structured Investments.
In March, UOBAM was awarded "Best Fixed Income Fund House" by industry research firm Morningstar at the 2017 Singapore Fund Awards.
Mr Chong, who oversees more than S$19 billion of fixed income funds (as of end February 2017) across developed and emerging markets around the world, elaborated on UOBAM's comprehensive risk management system embedded in its investment process.
For a start, the front end investment team does not just rely on credit ratings from credit rating agencies like Standard & Poor's, Moody's and Fitch.
Rather, an internal credit scorecard is used to evaluate bond issuers.
The scorecard assesses both quantitative factors like financial ratios, and qualitative factors like industry trends, the competitive advantage of the firm, regulatory developments, and the strength of its management.
The UOBAM fixed income team, which comprises 26 portfolio managers and analysts, also actively manages other aspects of risk.
A key risk is duration risk. This is the risk of a bond's price falling when interest rates rise. This can happen as inflation surges and the US embarks on a faster pace of rate hikes, Mr Chong says.
Managing duration, credit risk
To mitigate duration risk, the UOBAM team is holding on to more bonds that mature in a shorter period, as their prices are not affected as much by yield movements.
"We've positioned most of our funds with a shorter duration compared to their respective benchmarks," he says.
Another important risk to manage is credit risk, or the risk of bond issuers defaulting on their coupon payments. This risk is mitigated by avoiding some of the highest-risk issuers that are rated CCC by rating agencies.
The house is also more defensive on certain China property companies which have performed relatively well.
"Given that the recent government measures have tried to contain the rise in China property prices, we're diversifying from China property-related credit, towards Chinese non-property issuers, as well as Indonesia and India credits, where we are positive on," Mr Chong says.
UOBAM has two other parts in its risk management system, apart from the internal credit scorecard and risk assessment used by investment analysts and portfolio managers.
Its middle office compliance team checks on the front-end team by ensuring it complies with the portfolio parameters set.
An independent risk management unit also evaluates the investment team. This team compares a fund's volatility versus that of the benchmark, and how much a portfolio deviates from its benchmark.
Meanwhile, the foreign currency positioning of the funds is also measured daily and reported to management every month.
Where foreign exchange risk is concerned, Mr Chong says the environment is not likely to be too volatile.
"The US dollar may strengthen but at a gradual pace. We don't see a big spike," he says.
With a solid risk management process in place and an overall investment philosophy around managing downside risk, a consistent return has been generated in the last five to 10 years. Thus its bond funds have won awards through the years.
They include the long-running, S$1.2-billion United SGD Fund, a short-duration bond fund meant to achieve a superior return over bank deposits, has recorded an average compounded return of 3.89 per cent per annum in the last 10 years, net of sales charges.
A longer-duration bond fund, the United Asian Bond Fund launched in 2000, returned 5.59 per cent per annum over the last 10 years, net of sales charges.
Another winner is the United Asian High Yield Bond Fund, launched in 2013, which has achieved a 9.53 per cent return per annum since inception, net of sales charges. The fund is the Platinum winner for the High Yield category in the Fund Selector Asia Awards 2017.
"According to Morningstar, most of our funds achieved an above average risk-adjusted return, which means we generated a stable return over a long period of time," says Mr Chong.
Superior versus peers
Meanwhile, 64 per cent of UOBAM's fixed income funds are rated four stars and above by Morningstar, he says.
Morningstar ratings compare the performance, the risks taken and the costs of a fund against its peers. Four stars and above are awarded to roughly the top third of funds.
UOBAM is also mindful of the needs of Singapore dollar-based investors, by basing funds in Singapore dollars and tactically hedging US-dollar assets back to the local currency, he says.
Looking ahead, Mr Chong says Asian fixed income may continue to generate stable returns to investors.
A rising middle class in Asia and ageing demographics may lead to more insurance and pension funds to seek fixed income exposure. "Bonds may continue to contribute to stable investment returns," he says.
"As fixed income investors, our priority to understand and manage risk explains our consistent returns and award-winning funds through the years."
Best Fixed Income Fund House
2017 Morningstar Awards
Best Performance for Asian Bonds (10 years)
Asia Asset Management 2017 Best of the Best Awards
Platinum Award - United Asian High Yield Bond Fund (High Yield Category)
Fund Selector Asia 2017
Asia Fund House of the Year
AsianInvestor Asset Management Awards 2016