MBH/A35 alternatives

[s0crates]

Starting a thread to discuss viable (often better options to the bond ETFs available on SGX. I am looking at this from a simplistic portfolio construction perspective, where the fixed income product preferably has very low/negative correlation to equities, from a Singaporean perspective

What makes a FI product a viable alternative?

1. Low risk

Generally low expected volatility, This can be assessed by their underlying exposure/ fund mandate, and/or historical performance, and indicators like duration.

2. Decent yield/YTM

We want something better than stashing money under the mattress.

3. High liquidity

Ability to sell get proceeds relatively fast. So fixed deposits are out of this discussion

4. Low cost

Cost is a good predictor of performance.

5. No FX risk

Taking FX risk does not make sense when fund managers can hedge it out in a cost efficient manner.

Ok, lets start off looking how good/bad MBH/A35 is

	MBH	A35
Mandate	Non-Sovereigns Large Cap Investment Grade Index	SGD denominated debt obligations by SG gov or quasi gov entity
Credit rating	A	AAA
Number of underlying holdings	~110, from~46 issuers	~55 from 7 issuers
Duration	6.21 years	7.55 years
TER	0.25%	0.24%
last 1Y performance	-4.91%	-7.89%

Information is from here:

https://www.nikkoam.com.sg/funds/abf-singapore-bond-index-fundhttps://www.nikkoam.com.sg/funds/nikko-am-sgd-investment-grade-corporate-bond-etf
It does not take a genius to see that these funds have high duration, huge concentration risk even though it is low on credit risk.

I will compare against various fund products and their pros and cons.

 

[s0crates]

Let's compare against a very popular short duration, MMF like fund. LGI enhanced liquidity fund

	MBH	A35	LGI ELF (FSM)	LGI ELF (Endowus)
Mandate	Non-Sovereigns Large Cap Investment Grade Index	SGD denominated debt obligations by SG gov or quasi gov entity	Maintain a weighted average portfolio credit rating of A- and a weighted average duration of around 12 months.	Maintain a weighted average portfolio credit rating of A- and a weighted average duration of around 12 months.
Credit rating	A	AAA	A	A
Number of underlying holdings	~110, from~46 issuers	~55 from 7 issuers	Unknown	Unknown
Duration	6.21 years	7.55 years	0.6 years	0.6 years
TER	0.25%	0.24%	0.41%	0.25% (TER after rebate + Endowus fees)
last 1Y performance	-4.91%	-7.89%	1.03%	1.2%

https://secure.fundsupermart.com/fsm/funds/factsheet/LCP129/https://endowus.com/investment-funds-list/lion-global-sgd-enhanced-liquidity-fund-SG9999019301

I was doing a quick search on this product and realised that Endowus carries this on their Fund Smart platform at a cheaper share class, and after all costs this seems to be the cheapest solution.

Pros: Really low risk (very low duration risk), more diversified
Cons: Expect lower returns when longer end of the yield curve is giving much higher returns relative to short end.

 

[s0crates]

Another obvious comparison will be the SSB/SGS bonds. These are issued by the SG government, so practically no credit risk at all.

For SGS bonds

Pros: Non existent credit risk, pick and choose your duration risk based on maturity of SGS bond
Cons: Might not be able to sell at a fair yield on SGX due to low liquidity (nowadays better)

For SSB

Pros: No duration risk as always sell at par. Step up yield
Cons: When i/r decrease you cannot get capital gains. Bad for rebalancing due to that,

 

[s0crates]

High credit quality, longer duration bond funds

There are plenty of bond funds that are actively sold/pushed in the private banks for their "strong" performance. The PIMCO Income Fund is a familiar name in this space. Recent performance is lacklustre partially due to the rising interest rates, but still worthy of a closer look

	PIMCO Income class E IE00B9HH6X13	PIMCO INcome class I IE00BMB3HX34	MBH	A35
Mandate	Actively managed and utilizes a broad range of fixed income securities. Benchmark - Bloomberg U.S. Aggregate (SGD Hedged) Index All	Actively managed and utilizes a broad range of fixed income securities. Benchmark - Bloomberg U.S. Aggregate (SGD Hedged) Index All	Non-Sovereigns Large Cap Investment Grade Index	SGD denominated debt obligations by SG gov or quasi gov entity
Credit rating	A	A	A	AAA
No. of underlying holdings	Unknown	Unknown	~110, from~46 issuers	~55 from 7 issuers
Duration	2.54	2.54	6.21	7.55
TER	1.45% (mgmt fee, not TER)	0.55% + Endowus access fee 0.3%	0.25%	0.24%
Last 1 year performance	-8.95%	-8.13%	-4.91%	-7.89%

Source:
https://www.dollardex.com/sgn/?curr...=6Z55BARYXdN50zjBqLZbAUzI5iV1rkolR2W9cjr344k=https://documents.financialexpress.net/Literature/F2788B00E45921F7AB6C34E7605A2853/188910287.pdfhttps://endowus.com/investment-funds-list/pimco-gis-income-fund-IE00BMB3HX34
Based on my observations, the PIMCO income fund has a very active strategy6 (underweight Japan and UK, overweight US exposure). The duration risk taken shows how they really active manage their positions.

For a princely TER of 0.55%+0.3% TER on Endowus (the cheapest platform AFAIK), this fund needs to provide higher returns compared to its peers to be a viable alternative.

 

[s0crates]

BBGA SGD-hedged vs MBH/A35​

This will be a boglehead favourite for sure. You get to copy US index investing fans with the Bloomberg barclays Global Aggregate Index fund at fairly low cost, while still being SGD hedged. Will this fund convert the Vanguard fanboys to abandon A35/MBH?

Unfortunately this seems to be exclusive to Endowus.

	Index Global Agg 500m Fund	MBH	A35
Mandate	Bloomberg Global Aggregate (500 Million) Index is a variant of the standard Global Aggregate index and differs in that it requires higher outstanding minimums for bonds (for example, USD/EUR 500 million versus USD/EUR 300 million).	Non-Sovereigns Large Cap Investment Grade Index	SGD denominated debt obligations by SG gov or quasi gov entity
Credit rating	A	A	AAA
No. of underlying holdings	~16,000, 2,000 issuers	~110, from~46 issuers	~55 from 7 issuers
Duration	6.83	6.21	7.55
TER	0.1%+ 0.3% (Endowus access fees)	0.25%	0.24%
Last 1 year performance	(Since 9 Mar'22) -5.83%	-4.91%	-7.89%

https://endowus.com/investment-funds-list/amundi-index-global-agg-500m-fund-LU2420246212https://doc.morningstar.com/documen....msdoc/?clientid=endowus&key=96e5997ffa053252

As seen from the table this is way more diversified than our local boglehead favourites. Is there a case to be made for local SG exposure only? Would love to hear the case for it.

 

[s0crates]

Where are the MBH/A35 investors at? Or is it just a vocal few on Money Mind that is advocating for it?

 

[BBCWatcher]

Pros: Really low risk (very low duration risk), more diversified

How do you know it’s more diversified when even the number of holdings is unknown?

Also, there’s no such thing as “nonexistent credit risk” when it comes to bonds. There’s only lowest available credit risk (for Singapore dollars in this case).

 

[s0crates]

How do you know it’s more diversified when even the number of holdings is unknown?

Also, there’s no such thing as “nonexistent credit risk” when it comes to bonds. There’s only lowest available credit risk (for Singapore dollars in this case).

If you look at the underlying holdings in terms of type of issuers, geographical and type of fixed income products.

I don't believe that anyone can look at the type of index that MBH/A35 is replicating and don't find the mandate is too restrictive , hence leading to a very concentrated exposure.

Happy to agree to disagree.

Sure, please be pedantic about me saying sg government FI products have non-existent credit risk if it makes you feel smarter .

 

[BBCWatcher]

I don't believe that anyone can look at the type of index that MBH/A35 is replicating and don't find the mandate is too restrictive , hence leading to a very concentrated exposure.

….

Sure, please be pedantic about me saying sg government FI products have non-existent credit risk if it makes you feel smarter .

You realize you’re literally contradicting yourself within a couple short paragraphs? If you’re going to slam A35 (SGSes) for “concentrated exposure” then it’s more than a bit rich getting upset when someone politely points out SGSes are not zero risk but are lowest available risk vehicles for Singapore dollars.

If LionGlobal’s bond holdings are known then why did you write “unknown” in your table?

 

[s0crates]

You realize you’re literally contradicting yourself within a couple short paragraphs? If you’re going to slam A35 (SGSes) for “concentrated exposure” then it’s more than a bit rich getting upset when someone politely points out SGSes are not zero risk but are lowest available risk vehicles for Singapore dollars.

If LionGlobal’s bond holdings are known then why did you write “unknown” in your table?

Diversification can be beyond number of holdings, it can also be across different sectors or holdings.

Number of holdings are not disclosed, but you can see the top 10 holdings in the funds' factsheet.

Not sure where the contradiction lies mate.

And yes I like to call the credit risk of one of the few triple A government bonds in the world non existent. Are you going to question the concept of risk free returns in finance as being theoretical and incorrect?

Anything else you like to pick on?

 

[s0crates]

Anyway sharing is caring on an example of how buying a bond index can really screw you up.

Yields for Europe and Japanese for certain exposure has been negative for an extended period of time. Especially for government bonds.

A35 works only when you actively keep an eye on the yield. If it's anything close to zero or negative, GTFO. The risk is too high for potentially negative yield lol.

https://www.bloomberg.com/news/arti...-euro-area-debt-becomes-history-as-ecb-pivots
https://asia.nikkei.com/Business/Fi...egative-yields-as-ECB-joins-rate-hike-revival

 

[sohguanh]

Let's compare against a very popular short duration, MMF like fund. LGI enhanced liquidity fund

	MBH	A35	LGI ELF (FSM)	LGI ELF (Endowus)
Mandate	Non-Sovereigns Large Cap Investment Grade Index	SGD denominated debt obligations by SG gov or quasi gov entity	Maintain a weighted average portfolio credit rating of A- and a weighted average duration of around 12 months.	Maintain a weighted average portfolio credit rating of A- and a weighted average duration of around 12 months.
Credit rating	A	AAA	A	A
Number of underlying holdings	~110, from~46 issuers	~55 from 7 issuers	Unknown	Unknown
Duration	6.21 years	7.55 years	0.6 years	0.6 years
TER	0.25%	0.24%	0.41%	0.25% (TER after rebate + Endowus fees)
last 1Y performance	-4.91%	-7.89%	1.03%	1.2%

https://secure.fundsupermart.com/fsm/funds/factsheet/LCP129/https://endowus.com/investment-funds-list/lion-global-sgd-enhanced-liquidity-fund-SG9999019301

I was doing a quick search on this product and realised that Endowus carries this on their Fund Smart platform at a cheaper share class, and after all costs this seems to be the cheapest solution.

Pros: Really low risk (very low duration risk), more diversified
Cons: Expect lower returns when longer end of the yield curve is giving much higher returns relative to short end.

As of now LGI Enhanced Liquidity Fund is giving the best returns for the low risk. It is the fund included in Syfe Cash+, StashAway Simple, Endowus Smart Secure. The short duration suit current trend very well. But the con is as you mention. On average this fund is giving 1.1 to 1.2% for until this month as I have this fund also and indirectly via Syfe Cash+, Endowus Smart Secure

 

[sohguanh]

Before LGI Enhanced Liquidity Fund appear typically below MMF are options not sure if TS want to compare them? They have been around for a long time. FSM investor in year 2000 era use those to park funds while waiting to enter and buy UT. Later FSM introduce their own auto sweep account.

Fullerton SGD Cash Fund
LionGlobal SGD Money Market Fund
Phillip SGD Money Market Fund
United SGD Money Market Fund

Take note MMF like above need about 2-3 days to get your redemption proceeds. I found out recently Syfe Cash+ can same day get if submit before 11am business day and cap at 10k or 90% of your Cash+ portfolio.

Investor want same day transfer liquidity better maintain some bank account still e.g CIMB fast saver, Maybank iSavvy, SC eSaver etc

 

[tangent314]

When it comes to estimating the future performance of bond funds, 1Y performance is almost completely meaningless, so it makes no sense to cherry pick this particular property to compare bond funds. In a rising interest rate environment, of course short term bonds will outperform long term bonds if you look at the short time frame before and after the interest rate change. Conversely when interest rate drops, the opposite will happen. We can't always predict which way the interest rates will turn especially not in the long term.

I would say WA-YTM minus TER is more indicative of the long run expected performance of the fund with interest rates remaining constant and assuming no defaults.

In the long run, A35/MBH will outperform these short term bond funds.

 

[s0crates]

As of now LGI Enhanced Liquidity Fund is giving the best returns for the low risk. It is the fund included in Syfe Cash+, StashAway Simple, Endowus Smart Secure. The short duration suit current trend very well. But the con is as you mention. On average this fund is giving 1.1 to 1.2% for until this month as I have this fund also and indirectly via Syfe Cash+, Endowus Smart Secure

Yes. This fund is popular for a reason, and I think the fund manager has done a fantastic job managing risk while giving a higher return than MMF. Might not be able to replicate in the future, but it's a great alternative especially if the goal is to have a low/negative correlation to global equities for rebalancing purposes.

In a rising interest rate environment, of course short term bonds will outperform long term bonds if you look at the short time frame before and after the interest rate change. Conversely when interest rate drops, the opposite will happen. We can't always predict which way the interest rates will turn especially not in the long term.

Yes for sure. I would argue that some form of active management of a bond portfolio switching between short duration (like LGI ELF ) and longer duration bond fund (like PIMCO income fund or the Amundi BBGA fund) makes better sense.

Especially when yields/YTM on longer duration product is so low the risk/reward ratio is not worth it.

Anyway I just pick an investment period that I can pull out the data easily, not exactly cherry picking but the past 1 year of volatility is actually a good example of how MBH/A35 is not as safe as what people assume it to be.

 

[gold_eagle36]

Yes. Agree with some on the discussion that interest rate risk was not highlighted.

Would pick an active globally diversified bond fund anytime. Some of them are Sgd hedged to mitigate fx risk.

A35 / MBH too concentrated.

 

[tangent314]

I don't see the point in portfolio switching. If you are purchasing bond funds, you are in it either for the short term or for the long term. You use short term bonds funds like money market funds to park cash if you need low volatility, and you use long term bond funds for long term returns, e.g. as part of a boglehead 3 fund portfolio.

What you seem to be suggesting is timing the markets to switch to short term when you predict an interest rate increase about to happen, and switch to long term when you predict an interest rate drop. Sure, that would improve your returns except for two things: 1. can you really predict interest rate movements? 2. there are better ways to make more money if you can predict interest rate movement

I don't get the irrational hatred against A35/MBH. If the yield on longer duration products is so "low" to be "not worth it" as you claim, then the significantly lower yields on the shorter duration products would be virtually worthless. You claim A35/MBH as not safe because of interest rate risk, and then prefer PIMCO?

Each of these particular products serves the needs of the people that favor that kind of risk profile. Not everybody needs their bond fund portfolio to be a money market fund. Not everybody wants their bond funds to be high expense, to include currency risk, and to include junk bonds in them.

 

[s0crates]

What you seem to be suggesting is timing the markets to switch to short term when you predict an interest rate increase about to happen, and switch to long term when you predict an interest rate drop. Sure, that would improve your returns except for two things: 1. can you really predict interest rate movements? 2. there are better ways to make more money if you can predict interest rate movement

Unlike equities investing where companies profitability is an unknown, the returns of fixed income products are known. Yield curve can also invert, making it possible for someone to take on more risk but get higher returns. Yield curves inverting is not predicting interest rate movements mate, it is just observing what is factual. Seen how SGS yield curve have been flattening? Surely all of us can observe that?

Let's run a few simple examples to flesh this out.

Between a bond with a 2 year maturity and a 10 year maturity, both with the same yield to maturity 3.0%, which would you choose?

It depends, actually. If you have a 10 year investment horizon, you might just want to lock in the returns and not run any reinvestment risk, even though technically you take up more duration risk in the process.

But are bond funds that simple??

No. Absolutely not. Bond funds always run reinvestment risk, and as such you want to factor in duration risk in your fixed income investment.

You may want to take note of mispricing in bond markets and invest the way which gives you better risk adjusted return.

That would mean choosing a bond fund with a 2 year duration, but with a YTM of 5%, over a bond fund with a 5 year duration, but with a YTM of 3%. It is not rocket science, fixed income markets have other participants (like central banks) with other agenda.

I don't get the irrational hatred against A35/MBH. If the yield on longer duration products is so "low" to be "not worth it" as you claim, then the significantly lower yields on the shorter duration products would be virtually worthless. You claim A35/MBH as not safe because of interest rate risk, and then prefer PIMCO?

It is more like frustration on a lack of awareness of better alternatives. A frustration on how people can blindly apply US preferred investment choices (which still have room for customisation) into the Singapore context.

I listed down the pros and cons for that very reason. Pick and choose what you want out of your fixed income product!

You want absolutely zero risk? Go SSB
You want some yield but still relatively low risk? Short duration bond funds (like ELF) works!
You want an actively managed fund which has a long track record? Go for PIMCO
You want an index fund just because it is an index fund listed on SGX? Go for A35/MBH then

Honestly, can anyone just please help me understand whats so great about A35/MBH beyond "low cost"? Or STI for that matter? Is it low cost when we are paying fund managers a princely TER of above 20 basis points when the number of underlying products are so low? And to replicate an index at that??

Each of these particular products serves the needs of the people that favor that kind of risk profile. Not everybody needs their bond fund portfolio to be a money market fund. Not everybody wants their bond funds to be high expense, to include currency risk, and to include junk bonds in them.

The ideas I suggested have no currency risk - these are all SGD-hedged products so there are no FX risk. I think we are in agreement that there is no one size fits all solution, especially for people who know what they are doing. Which brings me again to the point.

Why A35/MBH? Why not something like Amundi BBGA instead?

 

[sohguanh]

The low allotment for Aug SSB has quicken the process for investors looking for higher yielding "close to" capital guaranteed investment instrument. This thread look apt for this situation. Welcome more readers to share in this thread.

Currently, I can think of below MMF and some cash mgmt solution

Fullerton SGD Cash Fund
LionGlobal SGD Money Market Fund
LionGlobal SGD Enhanced Liquidity Fund
Phillip SGD Money Market Fund
United SGD Money Market Fund

Syfe Cash+ (uses above 2 funds)
Endowus Smart Secure (uses above 2 funds)
StashAway Simple (uses above 2 funds)
FSM Auto-Sweep Account (never disclose what are the holdings)

 

[chopra]

Surprise no one says build a tbill/bond/shs ladder