Editor’s note: The projected returns for Syfe Cash+ has been revised higher to 2.3% in September 2022.
Despite the increased volatility in October, Syfe Cash+ has remained resilient and generated positive returns on a year-to-date basis.
After strong performances for much of the year, monthly returns for Cash+ turned slightly negative in October. Market sentiment was affected by several factors including rising bond yields, the expectations of Fed rate hikes next year, and volatility within the Chinese property sector.
However, as we saw in April, any underperformance is expected to be temporary. Clients who stayed invested back then saw strong positive returns over the next several months. Coming into November, we have seen a similar recovery as market uncertainties abided.
Syfe Cash+ performance
To achieve an enhanced return above bank deposit rates, Cash+ takes on a modest amount of duration and credit risk for higher return potential. Historical returns show us that as long as investors have a slightly longer time horizon (1 – 2 months and longer), they should be rewarded with a positive return with Syfe Cash+ and a yield premium above capital guaranteed alternatives.
As such, while there may be fluctuations in the daily returns of Cash+ during periods of volatility, periods of sustained negative performance should be rare. We encourage investors to be patient and not to make rash decisions during these periods. For clients who remain invested in Cash+, they will have seen a positive uptick in their portfolios over the last week.
Syfe Cash+ was designed as a way for people to get more out of their cash savings vis-à-vis traditional bank accounts. That remains our goal as we continuously look to improve and optimise our cash solutions.
In the past month, market sentiment has been affected by several factors including rising bond yields, the expectations of Fed rate hikes next year, and volatility within the Chinese property sector.
Notably, Evergrande’s ongoing liquidity issues have spread to some other Chinese developers, who have faced rating downgrades on looming defaults. The uncertainty also triggered volatility in the broader Chinese credit market as investors worried about the impact to China’s economy.
We would like to reassure clients that Syfe Cash+ has no direct exposure to Evergrande. However, one of the underlying funds, the LionGlobal Short Duration Bond Fund has a slight credit exposure to the Chinese real estate sector of around 6%, and manageable exposure to other sectors of China’s economy.
While the majority of the fund’s exposure is in Singapore and international bonds and high-quality interest rate securities, the fund’s performance has nonetheless been impacted by the dampened market sentiment around China’s outlook.
Although sentiment remains cautious, markets have been calmer after reports that Chinese authorities might loosen financing restrictions for real estate developers. Moreover, the fund’s exposure is to stronger Chinese businesses, which typically display balance sheet strength, manageable debt levels and prudent management.
With the improving political situation in China, the performance of Syfe Cash+ has picked up in recent days.
Understanding Cash+ returns
While Cash+ is a low-risk product, it is still an investment. The underlying Cash+ funds are traded and marked to market on a daily basis. This means that price movements of the funds can impact the returns of Cash+ in the short term.
Over the longer term however, fund managers typically hold the underlying bonds to maturity whereby investors will then recover the par amount of the bonds. In essence, this negates any price impact driven by short-term negative sentiments.
Moreover, we seem to be moving to an environment of rising interest rates. The US Federal Reserve may begin the rate tightening process by the end of 2022 while Singapore’s central bank unexpectedly tightened its monetary policy recently.
This is a boon for Syfe Cash+ over the mid-to-long term. Since the bonds within the portfolio have short durations (i.e. reach maturity faster), rising interest rates allow for them to be reinvested at a higher rate. This provides not only a higher expected return but also offsets the impact of short-term price movements.
Keep a longer-term perspective
As mentioned, to achieve an enhanced return above bank deposit rates, Cash+ takes on a modest amount of duration and credit risk for higher return potential.
Duration risk reflects how bonds with shorter maturities are less impacted by rising interest rates as compared to bonds with longer maturities. (When interest rates rise, bond prices fall.) Credit risk is the risk that an issuer defaults on the bond. A bond with a lower credit rating typically has higher return potential as a trade-off for the investor taking on that risk.
As such, while there may be fluctuations in the daily returns of Cash+ during periods of volatility, periods of sustained negative performance should be rare. Ultimately, with bank interest rates still low, Syfe Cash+ can provide investors with a longer-term horizon an alternative to get a better return on their savings.