Fixed income fund flows in SG see tailwinds as rate cut bets grow
Mutual fund flows into Singapore-registered funds climbed in the second quarter, as investors piled into fixed income, including money markets, according to latest Morningstar data.
Global fixed income dominated a bulk of the fixed income flows for Singapore-registered funds, while Asian fixed income was another popular category, said Arvind Subramanian, senior analyst, manager research, Morningstar, at an August 22 webinar.
Fixed income funds are gathering tailwinds even as questions swirl around the appeal of money market funds as the US mulls a long-awaited interest rate cut.
Unit trust funds, or mutual funds registered for sale posted net inflows of around SGD2.8 billion in the first half of this year, according to Morningstar and the Investment Management Association of Singapore.
Fixed income led the pack with inflows of SGD906.94 million, followed by money market funds, with SGD622.2 million, and then equity funds, with SGD261.16 million.
“Another interesting trend is emerging market fixed income, which hadn’t seen too much flows earlier but we saw positive numbers in Q2,” he said.
Several fund managers have recently told AsianInvestor that fixed income will pop up on investor radars as interest rates slide and the US, the world's largest economy, starts to slow.
TAILWINDS COMING
Fixed income investors have faced high volatility in the past few years.
In 2023 alone, the 10-year Treasury yields went from 3.5% in January to 5% in October and then ended the year close to 4% after a sharp rally.
That intense volatility has kept investors cautious on fixed income funds even though the sector had extremely attractive yields, Morningstar noted.
“All the major fixed income sectors carry yields that are well above their five-year average, which makes bonds attractive for yield-seeking investors," said Subramanian.
With markets now more bullish on rate cut expectations, fixed income funds are experiencing tailwinds, he said.
"The timing is uncertain, but the direction is very clear, so perhaps it's time for increasing duration risk in investors portfolio," Subramanian noted.
While short term funds still have merit given their higher carry, it could be worthwhile for investors to look to add some amount of duration via intermediate duration funds through their portfolios."
Money market funds have definitely benefited from market volatility and interest rate hikes in developed markets, with a record $6.2 trillion parked in US money market funds.
“I would like to believe that fixed income and money market funds will continue to see a reasonable amount of inflows,” said Subramanian.
“It has been a very good run for money market funds, but with reinvestment risk, perhaps investors might consider increasing duration on fixed income investments,” he added.
Reinvestment risk is the possibility that an investor might be unable to reinvest cash flows at a rate comparable to their current rate of return.
“If we see yields decline meaningfully, I don’t think money market funds will have the same allure as they do today. Similarly, if you see volatility reducing, you will see a lot more money moving from money markets to other [fund] categories,” said Subramanian.
Money market funds outperformed all other asset classes over a three-year period with a 7.12% return, according to Morningstar.
PRIVATE ENTHUSIASM
Meanwhile, private credit has also been making waves over the past 12 months, with many institutions piling into the asset class even as others have steered clear.
Singapore has also made a push to attract global investment managers to set up shop in the city-state, especially private credit players.
Traditional asset managers have also been active in building up private credit capabilities.
“Singapore’s AUM [assets under management] grew by 10% to SGD5.4 trillion ($4.1 trillion), faster than the AUM growth in Asia,” the survey released in July said.
While traditional assets under management grew 7%, private market assets grew by 8% in 2023, according to a recent asset management survey by the Monetary Authority of Singapore.
While traditional assets under management grew 7%, private market assets grew by 8% in 2023, according to the survey released in July.
“This reflected the challenges faced by asset managers in raising funds and managing monies, amidst continued market volatility in public markets and investors’ caution,” the survey said.
The outlook is improving, said Sean Murphy, fund formation partner at legal firm Cooley's Singapore office.
Cooley
"We see increasing demand in South and Southeast Asia, particularly for strategies focused on India and credit,” he told AsianInvestor.
“Although we do not expect to reach the peaks of several years ago, the next 6-12 months look to be a marked improvement from the fundraising lows of 2023."
“Sponsors from throughout the region, including China, India and to a lesser degree elsewhere in Southeast Asia, continue to look to Singapore as their funds expand their geographic scope beyond a single jurisdiction,” said Murphy.
Still, he noted that given the inherent costs, “this migration will favour larger fund sponsors and may present difficulties for emerging managers.”