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Amova SGD Investment Grade Corporate Bond ETF Shows Singapore Bonds Beat Expectations In 2025 · Investor Exchange

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  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
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  Welcome to the Deep Dive. Today, we're looking into, well, something of a contradiction
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  in the Singapore investment world.
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  We're diving into the financials for the year ended June 30,
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  2025 for an ETF that tells two quite different stories at once,
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  the Imova SGD Investment Grade Corporate bond index ETF.
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  Right. And our sources, mostly the fund's own annual report and financial statements,
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  they show this picture of really strong growth, big numbers.
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  Undeniable success on one hand. But there's also this persistent issue,
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  a kind of structural challenge that anyone looking at this needs to grasp.
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  Oh, and just quickly for anyone keeping track, this ETF used to be the NICO AM1.
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  The name changed over to Imova officially on September 1st, 2025, just so you know.
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  Yeah, good point. And that contradiction you mentioned, that's really our mission for you today.
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  We have this fund. It pulled in a ton of investor money, generated really impressive dollar returns.
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  But at the same time, it kind of failed at its main job, actually tracking the
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  benchmark it's supposed to follow.
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  So we need to figure out the why. Why the success?
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  Why the failure to track? And maybe most importantly, what's the biggest risk
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  looking ahead? Exactly. What really defines its outlook?
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  Okay. So let's unpack the performance scorecard for that 2025 financial year.
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  Starting with the good news, the absolute numbers. They look great. Yeah, really strong.
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  The total return after tax hit nearly $39.7 million.
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  That's a huge GE leap from the S$34.9 million the year before.
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  A massive jump. But maybe even more telling is the sheer growth in size.
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  The fund's net assets, they ended the year at almost $783 million.
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  Up from, what, 580 to 5, 586 million dollars? Exactly.
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  That's nearly $200 million in growth in just one year. That scale definitely
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  gets your attention. It really does. And it's fascinating when you drill down into why it grew so much.
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  That S-197 million dollar increase in net assets, well, the fund's actual investment
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  performance only accounted for about 49.7 million dollars of that.
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  Okay. So the operating performance. Right. The rest, a whopping S-169.9 million dollars.
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  That was purely new money coming in from investors.
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  Net unit creation. Wow. So people were just piling in. Piling in, think about it.
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  S218.4 million dollars came in through new units being created,
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  and only about 748.5 million dollars went out through cancellations.
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  It shows this fund wasn't just profitable. It was incredibly popular.
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  Investors really wanted exposure to these Singapore investment-grade corporate bonds.
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  Suggests maybe they prioritize getting that specific exposure,
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  you know, the high credit quality, the liquidity, maybe even over-squeezing
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  out every last basis point of return.
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  That could well be part of the story, yeah. But that brings us neatly to the,
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  let's call it the less good part, the relative performance.
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  Right, the tracking gap. This is the big aha moment, I think.
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  You have this super popular fund growing like crazy, and yet it consistently
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  lagged the very index it's designed to mimic.
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  Exactly. If you look at the benchmark, that's the IBOX SGD Non-Sovereign's Large
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  Cap Investment Grade Index, the fund underperformed across, well,
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  every period they measured.
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  So for the one-year period ending June 30th, 2025, the fund returned 8.27 percent.
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  But the index, it did 8.76 percent. That's a gap of, what, 49 basis points?
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  Nearly half a percent. And it's not just a one-off. It's consistent.
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  You look at the three-year annualized numbers. Let me guess. Same story. Yep.
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  Fund. 5.34% index. 5.68%. Again, a noticeable lag. And the students and steps. Same pattern.
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  Funds at 2.90% annualized. The index is at 3.26%. So the core job of an index
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  ETF is just to replicate the index return minus fees.
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  And this one consistently doesn't quite get there. It falls short, yes.
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  Fractionally, but consistently. It does make you worry that someone might just
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  see that big S49.7 million dollar absolute gain and miss this,
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  well, this fundamental tracking issue.
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  So let's dig in. Why the strong absolute performance, the capital gains,
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  and then why the lag against the index?
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  Right, it's a strength. The S49.7 million dollar gain that mainly came down
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  to the market just moving in the right direction for the bonds they held.
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  If you look at their statement of total return, the big number is labeled net
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  gains on the value of investments. That was 51.2 million dollars.
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  So bond prices went up. Capital appreciation. Precisely.
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  Bond prices appreciated quite a bit over that year, adding value beyond just
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  the regular coupon interest payments.
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  And does the report give clues about which bonds drove that?
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  It does. Indirectly. When you look at the portfolio breakdown,
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  you see it's heavily, heavily concentrated in Singapore.
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  About 68, nearly 69 percent by geography and the top sectors.
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  Banking at 31 percent and government link stuff at over 21 percent. Ah, okay.
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  So you've got these big, stable, high-quality Singapore names.
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  And if the market view on those improved or rates moved favorably for them,
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  their prices would go up.
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  That's likely a big part of it, yeah. The perceived strength of those major
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  Singapore institutions probably helped drive that capital appreciation.
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  Okay. That explains the strong absolute gain. But now, the lag.
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  Yeah. The underperformance. We know fees are part of it. The TER,
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  total expense ratio, is low, 0.26%. Right. Very stable, too. Same as 2024.
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  It's cheap. But wait, if the lag over the year was, you said, 49 basis points,
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  And the fee is only 26 basis points? That doesn't add up. Where's the other
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  23 basis points of underperformance coming from?
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  Ah, and that's where the fund strategy comes in. It's really important for understanding this gap.
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  That tracking difference, it's almost always down to two things.
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  Fees, which we know, and the choices made in the investment strategy.
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  This fund uses what's called a representative sampling strategy.
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  Okay, representative sampling. What does that mean in practice?
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  Well, think about the index. It might have, say, 100 different bonds in it.
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  Full replication would mean the ETF buys all 100 bonds in the exact same weights.
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  Which sounds expensive and maybe complicated to manage. It can be,
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  especially with bonds that might not trade very often.
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  So representative sampling means they don't buy all 100.
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  Instead, they buy a smaller, carefully chosen subset of bonds.
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  A sample that's designed to have basically the same characteristics as the full
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  index, Same average credit quality, duration, sector exposure, things like that.
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  So they're making a trade-off. They get cost savings and maybe easier management.
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  Exactly. It's more efficient.
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  But the trade-off is your portfolio isn't identical to the index.
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  It's just similar. And the rules allow for that. They don't have to hold only index bonds.
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  Correct. The prospectus actually allows them to hold up to 20% in securities
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  that aren't even in the index as long as they help match the index profile.
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  Okay. So that's where the rest of the tracking error comes from.
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  The small differences between the bonds they chose to hold in their sample and
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  the actual bonds in the IBOX index, plus the fees.
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  That's almost certainly the explanation, yes.
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  The combination of the management fee and the slight performance drift inherent
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  in not holding the exact index portfolio.
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  It's a deliberate strategic choice, then.
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  They accept a bit of tracking error and return for efficiency and keeping that
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  TER low at 0.26%. Precisely. For the fund manager, it makes the ETF viable,
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  especially for retail investors.
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  For you, the investor, you get easy access, but you have to accept your return
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  will likely always trail the index slightly. It's the, you know,
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  the cost of that convenience.
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  Okay, that makes sense. Now, here's where I think it gets really interesting.
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  Let's shift focus to the future.
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  The outlook, and particularly the risks involved, especially given it's a bond
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  fund and we know how sensitive bonds can be.
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  Absolutely. And the annual report is actually very clear about the biggest risk factor.
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  It's unambiguously interest rate risk. No surprise there for a bond fund,
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  I guess. Not fundamentally surprising, no.
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  But the magnitude they disclose is what's key because the fund holds a lot of
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  fixed rate bonds, some with quite long maturities.
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  It's very sensitive to changes in overall market interest rates or,
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  you know, shifts in central bank policy. And do they quantify that sensitivity?
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  They do. And it's a number you really need to pay attention to.
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  They state that a 1% increase or decrease in market interest rates,
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  so 100 basis points, would cause the fund's net asset value,
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  the NAV, to decrease or increase by approximately 6%.
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  Wow. Okay, hold on. A 6% swing in value for just a 1% change in interest rate. Yes.
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  And that 6% sensitivity figure, by the way, it's unchanged from the 2024 report.
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  So it's a persistent feature of this fund's profile. That feels significant
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  for something often seen as a relatively safe investment grade product.
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  It is significant. It highlights the duration risk in the portfolio.
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  Basically, the average time until the bonds pay back their principal is long
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  enough that changes in the discount market interest rates have a really amplified
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  effect on their current price. So let's put that 6% number in context.
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  The fund's total return for the year was strong, 8.27%. Right.
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  But if interest rates were to suddenly jump up by 1% tomorrow...
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  That 6% sensitivity implies that, theoretically, more than two-thirds of that
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  annual gain could be wiped out just by bond prices falling.
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  That's the potential impact, yes. It underscores why the fund's outlook is so
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  heavily dependent on what happens with interest rates going forward.
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  Rate stability is good for them. Rate volatility, not so much.
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  We should probably also touch on that concentration risk again.
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  We're now thinking about outlook.
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  Yeah. He said almost 69% in Singapore, over half in just banking and government
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  sectors. Yeah, that concentration cuts both ways. On one hand,
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  it's packed with high-quality names.
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  You know, over 36% of the portfolio is rated AO, the highest possible rating.
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  That provides a lot of credit comfort. Which likely drove the strong performance we saw.
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  Likely. But the flip side is, the fund's fate is really tied very closely to
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  the health of the Singapore economy, and specifically, those key sectors like
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  banking and real estate indirectly.
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  So if there were some kind of unforeseen shock specific to Singapore,
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  even these high-grade bonds could suffer?
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  It's possible, yes. It's a non-diversifiable risk specific to that concentration.
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  You're betting heavily on Singapore Inc., essentially.
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  Okay. What about the day-to-day operations?
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  Liquidity, stability, especially with all that money flowing?
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  Operationally, it looks very sound. The report mentions they keep a cash buffer
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  specifically to handle daily redemptions, so they're managing liquidity risk.
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  And their liabilities are all very short-term, due in less than three months.
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  Seems stable and accessible too, right? I think you mentioned it's available
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  under the CPF investment scheme.
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  That's right. It's included under the CPFIS ordinary account.
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  Classified as low to medium risk, but narrowly focused on Singapore.
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  That accessibility is probably a big reason for its popularity with local investors.
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  And the quality is anchored by those huge top holdings.
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  Names like Temasek Financial, HSBC, NTUC Income Insurance, Intel Treasury.
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  Big familiar institutions. Exactly. Those provide the bedrock credit quality
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  that attracts and retains investors, especially those using CPF funds.
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  Okay, wow, that was a really thorough deep dive. Let's try and synthesize the key takeaways.
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  For the financial year ending June 30th, 2025, the Imova ETF showed really strong absolute success.
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  Huge asset growth driven by massive investor inflows nearly as $170 million
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  net and solid performance with $51 million in capital gains. Absolutely.
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  Very popular, very strong dollar returns. But, and this is the crucial but,
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  the fund consistently underperformed its actual benchmark index,
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  the IBOX SGD non-sovereigns. Across all time periods measured.
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  Right. And that underperformance, that tracking gap, isn't an accident. It's baked in.
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  It's the result of the low 0.26% management fee plus the fund's use of that
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  representative sampling strategy.
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  Which sacrifices perfect index replication for lower costs and efficiency.
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  Exactly. It's a structural tradeoff.
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  Looking forward, the big factor influencing its performance,
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  especially its volatility, is interest rate risk.
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  That 6% sensitivity number really sticks out.
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  A 1% move in rates potentially shifting the NAV by 6% highlights just how exposed
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  it is, despite holding high-quality bonds.
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  It's the key risk metric to watch. So tying this all together for you,
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  the listener, we have this fund.
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  Consistently trails its benchmark return, but offers high credit quality,
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  lots of anea, good liquidity, easy access, and that low 0.26% expense ratio.
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  So the final provocative thought, the question you need to ask yourself is this.
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  Does the certainty, the convenience, the easy access to this specific basket
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  of high-grade single-core bonds through this ETF, does that justify paying the
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  price of persistently getting a slightly lower return?