Latest / Investor Exchange / Amova ABF Singapore Bond Index Fund Reports Strong 10.61% Returns In 2025

Transcript

Amova ABF Singapore Bond Index Fund Reports Strong 10.61% Returns In 2025 · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
• 0:08
  Welcome to the Deep Dive. Today, we're tackling a hefty document,
• 0:11
  the annual report for the ABF Singapore Bond Index Fund for the year ending June 30th, 2025.
• 0:18
  Our job is to take this stack of information and, well, really boil it down for you.
• 0:22
  We're zeroing in on the fund's financial performance, figuring out what drove
• 0:26
  those results, and importantly, what the risks look like now for this major Singapore bond ETF.
• 0:31
  Right. And just to set the scene quickly, this is Singapore's very first exchange-traded bond fund.
• 0:35
  It tracks the IBOX ABF Singapore Index, so it mainly holds high-quality Singapore
• 0:39
  government bonds and some quasi-government ones, too.
• 0:43
  Think of it as typically a pretty stable conservative core holding for many.
• 0:47
  OK, that context is key because stable isn't exactly the first word that jumps
• 0:51
  out from these 2025 numbers.
• 0:52
  Let's unpack this, starting with the headline figures, the statement of total return.
• 0:56
  For 2025, the total return was over $105 million Singapore dollars.
• 1:01
  It's $105,209,737 to be exact.
• 1:05
  Yeah. And that number should really make you stop and think,
• 1:08
  especially when you compare it.
• 1:09
  The year before, 2024, the total return was just $15.4 million.
• 1:15
  So we're talking about a huge jump, a massive swing in just 12 months.
• 1:20
  And you see that right down to the individual unit level too,
• 1:22
  right? The net asset value, the NAV per unit, basically what each share is worth.
• 1:26
  That saw a healthy rise, too.
• 1:27
  It went from S1.0390 at 2024 up to S1.1225 in 2025.
• 1:36
  But the percentage return, that's maybe the most startling bit. Oh, is that a fake year?
• 1:40
  The one-year return for the fund itself was 10.61%. It tracked its index pretty
• 1:44
  well. The index returned 10.90%.
• 1:47
  Very close. Hold on. 10.6%. On a fund that's mostly government bonds,
• 1:52
  that sounds, well, almost like equity returns, not steady fixed income.
• 1:55
  What happened to the conservative part? That's the tension. Exactly.
• 1:57
  And if you look back further, the contrast is even more stark.
• 2:00
  Over the last five years, the fund's annual return was only 0.44%,
• 2:04
  just under half a percent per year.
• 2:06
  Wow. And since it started nearly 20 years ago, the annualized return is just
• 2:09
  2.40%. So that 10.61% in 2025, it really stands out. it suggests an exceptional
• 2:17
  year for bond values, not just steady income.
• 2:19
  It wasn't typical performance. Right. So if it's usually aiming for,
• 2:23
  say, 2-3% stability, getting over 10% means something big must have happened
• 2:27
  to the price of the bonds it holds.
• 2:28
  We really need to dig into the why behind this surge in 2025.
• 2:32
  Because, you know, when people think bonds, they usually think interest payments, the coupon.
• 2:36
  But those payments alone couldn't possibly generate S105 million dollars in
• 2:40
  return on a billion dollar fund. Precisely.
• 2:42
  You look at the income statement, I mean, the actual interest income is,
• 2:45
  well, it's a pretty small piece of the pie here.
• 2:47
  The huge total return came almost entirely from what the report calls net gains
• 2:52
  on value of investments, basically capital appreciation.
• 2:55
  And those net gains, they absolutely skyrocketed, hit $707,674,141 in 2025.
• 3:04
  Compare that to less than $18 million the year before. That $107 million gain,
• 3:08
  that's the whole story, isn't it?
• 3:10
  It really is. And maybe we should quickly explain how that works for bonds for anyone listening.
• 3:15
  Think of bonds like a seesaw with interest rates.
• 3:18
  If market interest rates, the ones set by central banks or expected by the market
• 3:22
  go down, then the price of existing bonds, which pay a fixed,
• 3:26
  now relatively higher rate, has to go up to sort of balance things out in the market.
• 3:31
  Ah, right. So the bond becomes more valuable because its fixed payout is better
• 3:35
  than what new bonds are offering. Exactly.
• 3:37
  And that increase in its market price is the capital gain. It's the paper value going up.
• 3:41
  So translating that to this fund's financial year ending mid 2025.
• 3:46
  It strongly suggests the market was pricing in or expecting interest rates to
• 3:51
  fall globally, maybe regionally, too.
• 3:54
  Absolutely. That's the context. The market was anticipating that central banks
• 3:57
  might start cutting rates, perhaps because inflation looked like it was cooling off.
• 4:01
  And that expectation, that shift in sentiment is what sent bond prices surging.
• 4:06
  Which explains how a safe government bond fund suddenly acted,
• 4:10
  well, almost like a growth stock.
• 4:12
  It wasn't driven by the steady coupon payments, but almost entirely by these
• 4:16
  changing expectations about future interest rates. Okay, that makes a lot more sense now.
• 4:21
  The performance wasn't really earned from the bonds yield in the traditional
• 4:24
  sense. It was kind of given by the market's changing view.
• 4:28
  And speaking of costs, you mentioned the income was small, were the expenses significant at least?
• 4:34
  Actually, no. The operating costs were tiny compared to those gains.
• 4:38
  You're talking about things like the management fee, about S1.55 million dollars.
• 4:42
  Custody fees around S170,000 dollars. The total recurring expenses were about
• 4:48
  S2.4 million dollars. It's really
• 4:50
  just a rounding error next to that S-107 million dollar capital gain.
• 4:53
  Right. Negligible. OK, so the market drove the returns.
• 4:55
  What about investor activity? Did people pile in or pull out?
• 4:59
  Looking at the section on movements and unit holders funds, looks like the fund
• 5:02
  actually saw net inflows.
• 5:04
  That's right. There was healthy activity. Unit creation. So new money coming
• 5:08
  in amounted to about 79 million dollars.
• 5:10
  And that was more than the cancellations or redemptions, which were around S-53.3 million dollars.
• 5:15
  So a net positive flow. Yeah, net contribution from investors of roughly S25.7
• 5:20
  million dollars for the year. So the fund grew for two reasons.
• 5:23
  Its existing assets went up in value and investors put more money in overall.
• 5:28
  Which took the total size, the net assets attributable to unit holders,
• 5:32
  from just under $990 million up to almost S1.1 billion dollars.
• 5:38
  S1.095 billion dollars, technically, in just one year. A pretty significant jump in size. Okay.
• 5:45
  So we understand the scale of the growth and the main reason falling rate expectations
• 5:49
  causing huge capital gains.
• 5:51
  Let's quickly look at what's actually in the fund, the assets.
• 5:54
  Sure. We said it's high quality and the portfolio breakdown confirms that.
• 5:58
  It's heavily concentrated in sovereign bonds. We're talking Singapore government securities mostly.
• 6:02
  They make up 82.60% of the total net assets.
• 6:06
  Very high. Now what's the next biggest chunk? That would be the real estate
• 6:08
  sector, sitting at 10.95%. But in this fund, that mainly means bonds issued
• 6:12
  by the Housing and Development Board, the HDB.
• 6:14
  Ah, OK. So still very high quality quasi-government debt. Exactly.
• 6:19
  And geographically, it's simple.
• 6:21
  100% of the quoted fixed income securities are Singapore-based. No surprises there.
• 6:25
  And the credit quality reflects that government focus, right?
• 6:28
  This isn't a fund taking chances on defaults.
• 6:30
  Not even slightly. If you look at the credit ratings, it's, well,
• 6:34
  it's about as safe as it gets.
• 6:35
  You have S1.092 billion dollars.
• 6:39
  That's 99.69% of the assets rated a, that's the absolute top rating. And the rest?
• 6:45
  The tiny remainder, 0.34%, is rated AA1. So effectively, credit risk is off
• 6:51
  the table here. It's negligible. Okay.
• 6:53
  And we should also just quickly mention there was an administrative change noted
• 6:57
  kind of tucked away in the report, something investors might notice.
• 7:00
  Yes. Just a heads up, effective September 1st, 2025, so just after this reporting
• 7:04
  period ended, the fund manager changed his name.
• 7:06
  It used to be NICO Asset Management Asia Limited. Now it's called AMOVA Asset
• 7:10
  Management Asia Limited.
• 7:12
  So same strategy, same index tracking mandate, just a different nameplate on the manager's door?
• 7:16
  Pretty much. It's a corporate change, but the fund's objective and how it invests
• 7:20
  shouldn't change because of it. Worth knowing, though. Right.
• 7:23
  Okay, let's pivot now to the most critical part for you, the listener,
• 7:27
  thinking about the future, risk.
• 7:29
  After this incredible year driven by capital gains, how exposed is this billion-dollar
• 7:35
  fund if those market wins change direction, if rate expectations shift again?
• 7:39
  This is really where the analysis gets important.
• 7:42
  For a bond fund like this, the number one market risk is always interest rate risk.
• 7:46
  Given that bond values move opposite to interest rates, we need to know exactly
• 7:51
  how sensitive this particular fund is.
• 7:53
  And the report tells us. And the number they provide, it seems quite high,
• 7:57
  especially for something people might see as a defensive holding.
• 8:00
  It is significant. The report's sensitivity analysis estimates that a 1% change,
• 8:05
  either up or down in market interest rates, would cause roughly an 8% change
• 8:09
  down or up, respectively, in the fund's net assets.
• 8:12
  An 8% swing from just a 1% rate move. That's huge.
• 8:15
  It is. Put it in perspective. If you had $10,000 in the fund,
• 8:18
  a 1% rise in market rates could theoretically wipe as $800 off your value fairly quickly.
• 8:25
  So what makes it so sensitive? There must be something structural inside the
• 8:28
  portfolio. There is. It comes down to a concept called duration.
• 8:31
  Okay. Can you break down duration simply? And why is it the key factor here,
• 8:36
  driving both the big gains in 2025 and this future risk? Sure.
• 8:40
  Duration, in simple terms, measures how sensitive a bond's price is to changes
• 8:45
  in interest rates. Think of it like a lever.
• 8:47
  The longer the time until a bond matures, generally, the higher its duration.
• 8:52
  And the higher the duration, the more its price will jump around when interest rates move.
• 8:56
  So higher duration means more volatility in price for a given rate change.
• 9:00
  Exactly. That big 10.6% return we saw. That was duration working for the fund.
• 9:05
  Interest rate expectations fell, and the fund's high duration magnified the
• 9:10
  positive impact on bond prices.
• 9:11
  Ah, I see. So the flip side is, if rates go up, that same high duration will
• 9:16
  magnify the negative impact on prices.
• 9:18
  Precisely. It cuts both ways. So the reason the fund has this high 8% sensitivity
• 9:22
  must be because it holds a lot of long maturity bonds.
• 9:25
  That's exactly it. If you look at how the portfolio is broken down by maturity,
• 9:29
  it's heavily weighted towards the long end.
• 9:32
  The report shows a massive S, $631,976,000 allocated to bonds with maturities
• 9:39
  over five years. That's where most of the duration and therefore the risk sits.
• 9:45
  And how does that compare to the short end?
• 9:47
  Well, in the up to one year bucket, there's only about $39 million.
• 9:51
  Much, much smaller. So that heavy tilt to long dated bonds over a $630 million
• 9:56
  of them, that's the mechanism driving that 8% sensitivity number. That's the core reason.
• 10:02
  So if the market changes its mind, if central banks' signal rates might stay
• 10:06
  higher for longer or even rise, that long-duration chunk of the portfolio is
• 10:10
  where the value would drop most sharply.
• 10:12
  It really highlights how the source of last year's gains is also the source
• 10:16
  of the main future risk. Absolutely.
• 10:18
  Good to confirm, though, that other typical risks seem minimal for this fund.
• 10:21
  We already covered credit risk being virtually zero.
• 10:24
  Correct. And currency risk isn't really a factor either, since almost everything
• 10:27
  is in Singapore dollars.
• 10:29
  No significant foreign exchange exposure. And liquidity risk.
• 10:32
  Getting money out if needed. Seems well-managed, too. They hold some cash,
• 10:36
  have minimum redemption sizes, and all their liabilities are very short-term,
• 10:40
  due in less than three months.
• 10:41
  So the risk profile really boils down to that one big factor.
• 10:45
  Interest rate sensitivity, driven by duration.
• 10:47
  Okay, so let's pull this all together. What does it mean for you, listening?
• 10:51
  The ABF Singapore Bond Index Fund had, frankly, an amazing year in FY 2025,
• 10:56
  returning 10.61%. But that return wasn't from steady income.
• 11:00
  It was almost entirely driven by capital gains on its bond holdings,
• 11:03
  thanks to market expectations of falling interest rates.
• 11:06
  And the fund itself is built on incredibly safe assets, over 82% Singapore government
• 11:10
  bonds, almost 100% rated IAA or AA-1.
• 11:14
  So default risk is basically non-existent.
• 11:16
  But, and this is a critical takeaway, I think, that stellar performance came
• 11:20
  hand in hand with high sensitivity to interest rates.
• 11:23
  We know it holds a lot of long-term bonds over S630 million dollars,
• 11:27
  maturing beyond five years.
• 11:28
  We know that gives it an estimated 8% sensitivity to a 1% rate change.
• 11:32
  So the big question now is, after riding the wave of falling rate expectations
• 11:36
  to achieve a 10% gain, how does this fund perform if those expectations reverse?
• 11:40
  If the focus shifts from rate cuts to maybe rate stability or even hikes,
• 11:45
  that long duration structure, the very thing that created the games,
• 11:48
  becomes the primary risk to the fund's value going forward. A crucial point to consider.
• 11:53
  That wraps up our deep dive for today. Thank you for joining us and exploring these insights.
• 11:56
  Music.