Bond funds traditionally act as a counterweight to the equity portion of a portfolio, and the value of a bond is the ability to hold their value in the case of a market shock. In the world of bond universe, the more interest a bond gives, the least it will be able to withstand market shock and will often behave similarly to that of an equity. As we advance deeper into the later stages of the business cycle, we have to inevitably increase the proportion of bonds as the probability of a market crash gets higher as the business cycle mature. The current business cycle has seen an unprecedented prolonged period of low interest environment whereby it becomes uncertain how long more before the business cycle will turn to the recession phase, it becomes extremely unprofitable to hold low interest bonds for potentially long period of time.
Therefore, in order to generate more yield for the bond component of the portfolio, I have looked at a few options and decided to allocate a proportion to a slightly risker short duration bond fund (United SGD Fund) which can potentially give a higher return. Looking at the 10 years chart below, it is obvious in terms of risk/returns as compared to the very safe Deutsche Lion Bond which we are currently allocated.
During the European financial crisis, this fund lost 3% of it's value, but it is able to regain it's original value with a 8 months. On the upside, United SGD fund outperformed Deutsche by nearly 25%. By allocating 50% of the current bond portfolio into United SGD fund, it should act as a more aggressive driver for bond returns while Deutsche Lion Bond maintains its role as the absolute defence for the portfolio. After the switch, Deutsche and United will each occupy 30% and 30% of the overall portfolio.
Take note that this allocation is only applicable to CPF-OA and SRS funds. As for the Cash funds, I am looking at a USD short duration high yield fund which will replace the existing USD money market fund. There is still a few technical details which needs to be sorted out with IFAST so I will be initiating that switch once it is resolved.
Therefore, in order to generate more yield for the bond component of the portfolio, I have looked at a few options and decided to allocate a proportion to a slightly risker short duration bond fund (United SGD Fund) which can potentially give a higher return. Looking at the 10 years chart below, it is obvious in terms of risk/returns as compared to the very safe Deutsche Lion Bond which we are currently allocated.
Take note that this allocation is only applicable to CPF-OA and SRS funds. As for the Cash funds, I am looking at a USD short duration high yield fund which will replace the existing USD money market fund. There is still a few technical details which needs to be sorted out with IFAST so I will be initiating that switch once it is resolved.
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