Corporate bonds seen as attractive

CEO: Bonds give decent yields and can hedge against inflation

PETALING JAYA: With rising inflation a growing concern at present, investors need to look at various avenues in order to reduce the erosion of the value of their fixed incomes.

According to the Statistics Department, the Consumer Price Index (CPI) in Malaysia for May 2011 registered a year-on-year increase of 3.3% from 99.6 to 102.9. Compared with the previous month, the CPI increased by 0.3% in May 2011.

The CPI increase in May this year was due mainly to higher transport, housing and utility costs.

Hong Leong Asset Management Bhd executive director and chief executive officer Geoffrey Ng said investments in bonds provided decent yields and could act as a hedge against inflation if done correctly.

He said investors needed to have a long term outlook where fixed-income assets were concerned.

“Nowadays, you see a lot of financial companies and banks with savings products where they say, deposit money with us for five years and you will be paid returns of 4.5% to 5% per annum.

“These look very attractive because fixed deposits offer only 3.2% or 3.3% per annum. However, the danger is that you are locked in for the next five years, and thus, you will lose out on potential returns eventually if interest rates keep rising,” he said.

Ng added that considering the Government's recent scale-back of subsidies on items such as fuel and food-based essentials, he foresaw a period of one to two years where inflation would be above the long term average in Malaysia.

He pointed out that while investing in property was an option as a hedge against inflation, the spike in prices over the last two years especially in the Klang Valley had put a damper on affordability, which will be affected further if interest rates continue rising.

As such, investing in bonds is a good option provided one is careful and prudent, according to Ng.

“Don't lock yourself in for too long a period buy shorter dated bonds that roll over at progressively higher rates.

“There are many floating rate bonds available nowadays where you can easily adjust upwards as the interest rates go up. Of course, with asset management companies, fund managers use a combination of money market, bonds and derivative products to attain returns above inflation,” he said.

Ng said one should have a diversified investment portfolio, with a good mix of a variety of asset classes. “Yes, equities always play a role in our investments. However, equities are more volatile and their prices are impacted by many factors such as the state of the economy, health of corporate earnings and availability of liquidity.”

He said those looking for income stability could consider investing in defensive equities that constantly pay dividends.

On the bond market, Ng said “buy-and-hold” investors should currently avoid government bonds as “prices are high and yields are not attractive.”

“The government bond market today is a trading market as we are at historical highs in terms of government bonds being bought by foreign investors. They have kept most of their interest in the very short dated government bonds resulting in higher prices and lower yields.”

Ng said short and medium term corporate bonds offerred attractive yields presently, as credit risk was not much of an issue in the current economic environment.

At this point in the economic cycle, companies are generally still growing and generating sufficient cash flow to pay off bondholders.

According to Ng, there is presently strong demand for good quality corporate bonds.

“These corporate bonds are still priced reasonably although their yields are compressing due to the strong demand.

“We can still see yields of 4.5% or 5% per annum for the best quality five-year corporate bonds. Single A rated bonds typically offer higher 6% to 6.5% per annum,” he said.

Ng recommends corporate bonds issued by financial institutions and utility companies. “At this point in time, banks are in a healthy state and utility companies continue to generate good cash flow.”

As at May 31, 2011, Hong Leong Asset Management has total assets under management of RM3.752bil.

Apart from equity funds, the investment house also manages a range of bond funds and money market funds for retail and institutional investors.

Some of its high performing bond funds include the Hong Leong Global Bond Fund and Malaysia-only Hong Leong Bond Fund, which returned 12% and 4.2% respectively in the one-year period ended June 24, 2011.