One of the ideas of starting this blog was to write things that I myself would want to read.
So yah, connecting with most people and writing in plain english is fine but sometimes you just want to go full on technical for Financial Advisory practitioners. So this will be a technical writing.
I was just in a presentation yesterday on the Eastspring Global Target Income Fund**.
The presentation was good, kudos to the presenters as they clearly knew how to emphasize the appeal of the product.
There was one bit which was interesting was the reasoning behind the launching of the fund. Apparently Target Income Funds, close-ended, 3 year tenure, investing in high yield bonds for a targeted 5% return per annum, is popular. In fact the funds are so popular that the fund manager have to launch new funds on a continual basis due to old funds closing after their 3 year tenure is up.
Therefore the fund manager concluded that it should launch a ‘perpetual’ Target Income Fund, which will be open-ended, not close-ended, but still invest in the same short duration high yield bonds. Instead of launching funds (they call it ‘series’) constantly, they will have just one fund, forever. Instead of buying and holding bond papers in a fixed tenure case, the fund just have to tweak their routine a little by buying, holding, AND replacing expired papers with new ones in this perpetual tenure case.
So yep, it just became a normal bond fund, albeit one focusing on high yield bonds.
After that, a colleague commented, why did they sell it that way? Why did they dress it up as a perpetual close ended fund while in actual fact it IS just a regular bond fund?
Obviously the answer is that they want to associate themselves with the close ended bond funds. Their previous close ended bond funds generated higher returns than normal bond funds. Of all I said about people not doing apple to apple comparisons, people apparently did so by comparing regular bond funds with close ended bond funds. So while traditional bond funds have been returning boring 4%per annum, the 5% offered by a close ended bond fund sounds like a steal, right? Right? I mean they are both bonds asset class, right?
Of course they are not the same. Target Income Funds invests in high yield short duration bonds. In investment terminology, high yield bonds are also called ‘junk’ bonds, which due to their rating as ‘not investment-grade’, carries a higher risk of credit default, hence the ‘higher’ yield to attract people.
However, since nobody ever hear or experienced a junk bond default YET, everyone just assumes all bonds are the same. Which goes some ways in explaining why Close ended bond funds are so popular.
As always, know what you’re buying into and what you’re recommending to your clients. What risk you’re taking and what risk you’re asking your clients to assume.
(** Funds mentioned here are not a recommendation to buy them, you should consult a proper Financial Advisor to assess your cashflow, risk tolerance and investment diversification)