With bond yields globally in the dumps, Singapore’s wealth fund GIC is looking at unconventional sources for fixed income returns, Liew Tzu Mi, GIC’s chief investment officer for fixed income, said on Thursday.
For one, she pointed to selective emerging markets for fixed income investments.
“In a generally low interest rate environment, if you do expect that we are not going back to double-digit yield anytime soon and that generally we are still looking at modest returns from developed markets, clearly emerging markets is a very attractive opportunity,” she said at the DBS Institutional Investor Symposium in Singapore on Thursday.
GIC, which manages Singapore’s reserves, does not reveal its portfolio size, but on its website it said the amount was “well over $100 billion.” It has a long-term investment horizon.
Liew said that with the wide variations in credit quality across emerging markets, from non-investment grade countries such as Argentina and Venezuela, to single-A rated ones, such as Malaysia, GIC was looking for “idiosyncratic situations,” in emerging markets which were likely to converge with lower-yielding developed markets.
Bond yields move inversely to prices; as a bond’s yield declines, its price rises, offering investors the opportunity for capital returns in addition to the coupon payments.
Liew pointed to China as a convergence play, noting it was the world’s second-largest economy, with the third-largest bond market.
“Yet if you look at foreign ownership of domestic bonds, it’s next to nothing and the market is just starting to open up,” she said, noting GIC had the “fortunate position” to be able to invest there a few years ago.
“In the longer run, China markets will be a mainstream market for any global investor in fixed income and it’s not a question of if, it’s a question of when, and it’s already happening,” Liew said.
“At the same time, if you look at the currency, it has good prospects of becoming a reserve currency status,” she said. “From a GIC standpoint, when we manage foreign reserves for Singapore, these are what we call strategic importance to our portfolio.”
Liew noted risks to China’s bond market, such as a lack of liquidity, a lack of a variety of hedging instruments and concerns over the legal framework, such as when a company restructures its debt.
“But I think the more important thing, especially for our horizon, is to recognize that this is a market that we cannot ignore and therefore we have to be proactive in partnering with onshore regulators and help them develop the market,” she said.
Liew noted that India also had strategic importance to GIC’s portfolio.
Strategic emerging market investments weren’t the only non-traditional fixed income investment on GIC’s radar.
Liew said the “desktop investing mindset,” or just waiting for new fixed income issuance announcements, putting in an order and hoping the banks “are nice” and give you a good allocation, was “no longer sufficient.”
She noted that there was a lot of capital floating around and those getting allocations meant competing with trillion-dollar funds.
But GIC was instead partnering directly with companies to offer “bespoke” access to analysis and a range of financing options, with a longer-term horizon.
“We feel that this kind of investing at this part of the cycle gives us much better risk reward than let’s say the broad beta,” or the broader market’s return, she said.