Aboi's Updates For Malaysian Bond Mutual Funds for 2H'2015

The highly anticipated Mutual Funds updates for 2H 2015 is finally here. I shall start with the Bond sector (Mixed Assets and Equities in the coming days). First recap the 1 year returns of my previous picks:

AmDynamicBond (7.33%), PB Islamic Bond (5.51%), AMB Dana Arif (6.47%), Areca enhanced INCOME (3.57%), Affin Hwang Select Bond (8.02%), Hong Leong Global Bond (-1.54%). With the exception of HL, every bond fund provided a return which is more than a fixed deposit account (with the rate you can get a year ago which should be ~3.25%)

Bonds

TER is the total expense ratio, a measure of total cost (purchase, redemption, auditing, management fees) of a fund to the investor. The lower the better.

Commentary

[1] Removed Areca enhancedINCOME fund, the sharp blip is unexplained and for a bond fund this is unacceptable to me. Based on my previous info and its track record, it was not a mistake to me to recommend this fund. Nevertheless risk will always be present. You still gain a 1-year gain of 3.57% (on par to fixed deposit but nevertheless disappointing for a bond fund)

[2] AMB Dana will remain as third choice because of higher expense ratio. 

[3] AmDynamic is now back in bussines gaining 7.33% returns in one year. The recovery after the reopening of unit subscription is in line with my expectation.
[4] For outside exposure, both Affin Hwang Select Bond remains top choice. I am removing HL Global Bond. It was a mistake I admit to recommend a global bond at current high flying equities market in developed countries. Fund is now holding ~45% cash and as such there is very limited upside.
[5] As of this writing, I own AmDynamic Bond Fund.
[6] I will inject some cash into Affin Hwang Select Bond Fund (Asia Bond) as part of diversification outside of Malaysia.

I still cannot stomach to recommend AMB Income Trust yet nor Eastspring Investment Trust. A fund that leap frogs in ranking quickly may suggest that it is involved in high risk high return choices. It is of my opinion that a bond fund should be the least risky asset class (vs Mixed Assets & Equities type) and as such should strive for a balanced, consistent and sustainable returns. A good bond fund should give a higher return than that of a fixed deposit account but not at the expense of a lot more risk.

Take a look at what I meant by 'extraordinary results' which by my experience is associated to more risk taking in search of higher returns. The question is, what if those high risk takes don't turn out well?

*Nevertheless current returns of AMB and RHB-OSK suggests that they will return to a more normalized and expected yearly returns of a typical good bond fund. Their ranking should change in my next update in Dec 2015.

Examine the 'Extraordinary' returns for a Bond fund. Both these funds have very high Std Deviation values (7.79%, 4.04% and 5.38% respectively). AMB Income Trust is more favourable due to a far better Sharpe ratio of 1.43, Eastspring's 0.75 and RHB-OSK's 1.32.

The more consistent performers under the Bond umbrella. (Std deviation values from left to right: 2.19%, 1.33%, 1.19% and 2.47% only) with Sharpe ratio of nearly 1 except AmDynamic at 0.33. (due to massive redemption and reopening of subscription in 3Q2013)

Source: MorningStar - Rating & Risks section for respective fund

I will use a better risk-adjusted returns measure using the five principles of risk measures; alpha, beta, r-squared, std deviation and Sharpe ratio. I will just explain what they represent rather than showing hefty equations.

Alpha: A +ve of 1.0 means the fund has outperform its benchmark index by 1.0%. The opposite goes for -ve.
Beta: A +ve of 1.2 means the fund is 20% more volatile than the index. The higher the beta suggest it offers the possibility of higher returns but also posing more risk. The opposite goes for -ve. 
R-squared: A higher R-squared will indicate a more useful beta value (85 to 100) aka good correlation. A low R-squared value means you should ignore the beta. It's a measure on well the fund is measured against an appropriate benchmark.
Standard deviation: A large dispersion tells us how much the return on the fund is deviating from the expected normal returns.
Sharpe Ratio: The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. It describes how much excess return you get for extra volatility you endure in holding riskier asset.

Though the Sharpe Ratio value for AMB Income Trust & RHB-OSK Islamic Bond looks solid it is difficult for me to swallow such deviation. Until these values go down to a more reasonable level I will shy away no matter how 'extraordinary' the returns are. It's all about managing risk.


Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.