Fullerton Fund Management, empowered by a fundamentals-based investment approach

Based on data provided by Morningstar*, Fullerton Fund Management’s Fullerton Lux Funds-Asian Investment Grade Bonds has emerged as one of the top winners for the Best Funds Awards 2024 by The Edge Singapore in the Global Category for Asia Fixed Income.

Managed by Bennett Lim, the fund has fared well despite the interest rate volatility seen throughout the past year, which has presented fixed income fund managers with a challenging investing landscape against the backdrop of robust growth and optimism in the equities market.

Fullerton Fund Management’s Deputy Chief Investment Officer and Head of Fixed Income, Angus Hui (pictured), attributes the win to the fund managers’ emphasis on active management. He believes it is key to achieving a positive investment outcome. This involves focusing on macro analysis and credit-specific factors while considering market drivers and sentiment.

He further explains that the firm is guided by its fundamentals-based investment approach, which strongly focuses on valuation and employs a combination of top-down macro study and bottom-up credit research analysis.

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Photo: Fullerton

“Our team looks at risks from multiple angles, which is crucial for our judgement calls. We also prioritise collaboration within the investment team and make informed decisions using traditional, new and alternative tools,” says Hui.

With over 25 years of investment experience, Hui assumed his current position in 2022. He is responsible for further enhancing Fullerton’s award-winning capabilities, overseeing the fixed income team and deepening environmental, social and governance (ESG) integration within the firm’s fixed income portfolios.

With 16 years of investment expertise, Lim is the lead portfolio manager and has driven the fund’s success.

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Emerging opportunities

The Fullerton Lux Funds-Asian Investment Grade Bonds was launched on August 11, 2020. It seeks to invest in predominantly USD-denominated fixed-income or debt securities issued in Asia. These investment-grade issuances should have a minimum credit rating of BBB- by Standard & Poor’s, Baa3 by Moody’s or BBB- by Fitch. The fund may also invest in unrated bonds with similar credit quality.

As of February, the fund’s top five holdings are a treasury zero-coupon bill maturing April 2024 (8.9%), another treasury zero coupon bill maturing March 2024 (8.5%), Tencent Holdings 3.94% maturing April 2061 (3.0%), a Standard Chartered 6.296% note maturing July 2034 (2.9%) and a BNP Paribas 4.75% note maturing February 2034 (2.8%). The fund’s rating breakdown as of February is 20.9% AA bloc, 31.9% A bloc, and 50.2% BBB bloc.

The fund manager aims to outperform the JP Morgan Asia Credit Index (JACI) Investment Grade Total Return Index, prioritising better returns and risk-adjusted performance over cycles.

Hui explains that managers avoid fixating on minor differences in the fund’s holdings against the benchmark and instead focus on overall portfolio construction and forward-looking decisions. It is critical to be differentiated to generate alpha. This also means that the fund managers occasionally need to make contrarian calls. He also highlights that it is important for fund managers to be differentiated not just to be “dissimilar” but to be guided by their underlying convictions to add value.

“On a day-to-day or even week-to-week basis, we construct our portfolios without thinking too much about all the small differences between our holdings and the benchmark. To be honest, it is easier said than done. The easy part of my role is to keep reminding our fund managers that we need this mindset; the challenging task is implementing it,” adds Hui.

Amid the rising interest rates environment last year, the Fullerton team pursued a barbell strategy, investing in investment-grade Chinese tech companies with BBB ratings on one hand while also focusing on shorter-dated bonds on the other.

The positioning in the Chinese technology names was underpinned by its undervaluation assessment of the sector, given China’s market volatility — which in turn was driven by concerns over economic slowdown and regulatory changes in China. As the market continues to focus on state-owned enterprises, Fullerton capitalised on the emerging opportunities within private enterprises with higher spreads, Hui says. Its credit research analysts have followed these names for many years.

Separately, the firm also maintained sizable positions in short-dated bonds to ensure fund stability and yield. Looking ahead, Fullerton will continue this approach, as it is conscious of near-term rate uncertainty and consumer price index fluctuations while also keeping an eye on longer-term trends, such as anticipated US rate cuts in late 2024 or 2025. Hui says the firm constantly analyses credit profiles to adapt to the evolving macro environment.

“We also think of a few macroeconomic themes relevant to credit that would provide us with opportunities that we can capture. For instance, more issuances from Japan in US dollars or any opportunities arising from commodity price fluctuations and GDP stabilisation in China could present interesting ideas. Of course, there would be selected winners and losers from these trends, and we are conscious of the implications when positioning our portfolios,” he adds.

With inflation stabilising and economic growth decelerating due to the broader effects of increased interest rates, the year 2024 may continue to present attractive opportunities for fixed income.

Moving forward, the Fullerton team is closely eyeing several risks. Aside from the interest rate environment and fiscal policy moves, there is concern about how China’s excess capacity situation would impact other markets. In a recent visit to China, US Treasury Secretary Janet Yellen expressed concerns regarding state subsidies, which had contributed to manufacturing overcapacity in industries such as electric vehicles, solar panels and semiconductors.

Some market observers expect this to impact manufacturing firms in Japan, Europe, South Korea and other industrial countries.

Hui points out that another risk is the possibility of a divergence in credit performance. He explains that many good quality credits, including some in the high-yield sector, have been very resilient in the current cycle, while others face liquidity challenges. This divergence, especially in high-yield sectors globally, will affect emerging markets differently based on factors like currency strength and commodity prices.

‘Never normal’

There will always be a risk that the market will continue to evolve, says Hui. “There is a term called ‘never normal’ coined by [serial entrepreneur] Peter Hinssen, which describes the rapidly changing and unpredictable nature of the modern business environment, where constant innovation and adaptation are essential for success. Many people think this would mostly relate to the equity and venture capital scene, but in our view, this is also very relevant to the fixed income market.

“Considering how technology affects growth and inflation and the competitiveness of corporates, it underscores the need for adaptability in our portfolios. This perpetual evolution means there’s no longer a static ‘normal’ environment, demanding instead for a flexible approach in fixed income investing,” Hui adds.

Looking ahead, Hui cites several key factors shaping the investment landscape that would influence Fullerton’s fixed income portfolio management approach. Firstly, with interest rates expected to stay high, there is a need for fund managers to consider opportunity costs and risk premiums more keenly, necessitating a shift in focus from outperforming benchmarks to managing drawdowns and reducing volatility.

As integrating artificial intelligence and data analytics into investment practices becomes more widespread, Fullerton will continue to examine how these tools could enhance productivity, aid in security selection, and manage risk.

Although a slowdown in ESG appetite has been observed over the past few years, Hui is confident that a resurgence will be expected. Investment managers must also fine-tune their processes to meet those needs and look at opportunities within transition financing. He adds: “Overall, these trends present exciting opportunities in fixed income investment, requiring adaptability and a nuanced understanding of evolving market dynamics.”