Investment opportunity in foreign bonds for higher returns

Besides this, bond prices have become volatile, especially for quality bonds, which are extremely sensitive to news, rumours and monetary policy. As a result, investors seeking steady income may not generate enough from investment in government and corporate bonds. 

Apart from local bonds, there is an opportunity to invest in foreign bonds, which could increase chances of getting higher returns on investment and provide an attractive alternative. These include high-income bonds such as mortgage-backed securities (MBSs), high-yield bonds featuring senior-secured debts of corporate sectors, and emerging-market bonds. 

An MBS is an asset-backed product secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings determined by an accredited rating agency. An MBS usually makes periodic payments, like coupon payments. Furthermore, the mortgage must have originated from a regulated, authorised financial institution. 

The price of MBSs has currently dropped because of concerns about QE tapering. If the Fed begins to taper QE, there will be market concerns that MBS prices will be no longer be support by the US government’s ample liquidity. However, since the decision against tapering, MBSs will prove a proper investment choice. MBSs tend to increase in credit with the US and global economic recovery.

High-yield bonds command a lower credit rating than an investment-grade corporate bond, a Treasury bond, or a municipal bond. Yet because of their higher risks, they pay higher yields than investment-grade bonds. However, higher-yielding assets are expected to produce attractive returns if economic growth is robust, as a US economic recovery will likely improve credit issuers.

Senior-secured debts have superior features when allocated into corporate sectors. The meaning of this can be broken down as: 

_ A senior debt has a higher priority than unsecured or a more “junior” debt owed by the issuer. That is to say, it has greater seniority in the issuer’s capital structure; if the issuer goes bankrupt, a senior debt must theoretically be repaid before other creditors receive any payment.

_ A secured debt is backed or secured by collateral to reduce lending risk. 

Both of these are essential in a volatile economy. This is because during a financial crisis, many bank loans default, so senior-secured debts command a higher recovery rate than unsecured ones.

To offset an economic downturn in one region, investors should diversify investments in bonds of developed countries and emerging ones to enhance returns and reduce investment risk. For instance, while Europe or the United States are in a downturn, emerging countries could still be growing; investment in bonds of these countries is likely to achieve better returns than in Europe or the US. That said, for asset allocation within a fixed income, investors should consider factors other than traditionally focusing on interest-rate strategy and playing with duration. 

Investors can choose selective credits, such as investing in bonds of countries with strong balance sheets and low debts related to gross domestic product. 

Those inexperienced in foreign bonds may simply invest through mutual funds that invest in active managed foreign funds with a broad range of fixed-income securities, designed to maximise current income while maintaining a relatively low risk profile via their expertise in asset allocation within the fixed-income class. 

Investors should also consider a lower-risk-profile fund under a management team that has competency in credit investment analysis and good judgement of risk against returns, and under a fully hedged exchange-rate policy. 

 

_ Investment contains risk; please carefully study fund prospectuses before making your investment decisions.

_ The fund management department of Asset Plus Fund Management contributed this article.