Editor’s note: The projected returns for Syfe Cash+ has been revised higher to 1.9% in August 2022.
Syfe Cash+ delivered actual annualised returns of 1.63% as of 30 September 2021, performing better than its projected return of 1.5% per annum.
As such, we are maintaining the projected returns of Syfe Cash+ at 1.5% p.a. for Q4 2021.
Syfe Cash+ performance (as of 30 Sept 2021)
Amongst its peers, Syfe Cash+ continues to be one of the highest yielding cash management offerings with an optimal mix of high quality bonds geared to maximize projected returns without taking excessive risks.
Syfe Cash+ generated annualised returns of 1.56% in Q3 2021. The good returns in July and August were driven mainly by the stabilised China Huarong situation and easing inflation concerns.
In September, Syfe Cash+ delivered relatively lower monthly returns of 0.01% compared to July and August due to rising US Treasury yields on tapering concerns, which impacted the Short Duration Bond Fund in particular, and negative sentiment linked to China Evergrande.
Despite the near-term volatility, Syfe Cash+ has remained resilient. With actual annualised returns of 1.63% as of 30 September 2021, the portfolio has been able to generate good returns for our clients while giving them the peace of mind that their spare cash is being put to work.
No exposure to Evergrande bonds
Although our underlying LionGlobal bond funds have no direct exposure to Evergrande bonds, fears that Evergrande’s debt woes might pose systemic risk to China’s financial system nonetheless triggered some volatility in the broader bond market in September.
While sentiment remains cautious as the Evergrande situation continues to develop, all signs point to Chinese authorities having sufficient policy tools to prevent a systemic crisis. The People’s Bank of China (PBOC) has so far injected about 610 billion yuan (US$94.6 billion) into the banking system to help calm China’s financial markets and ensure sufficient liquidity. China’s central bank has also pledged to protect housing consumers.
Exposure to China’s real estate market
Evergrande’s liquidity issues have led to concerns over the Chinese property sector as well. In recent months, China has introduced a series of property tightening measures aimed at stabilising home prices and reining in property bubbles.
This includes the “three red lines” policy – a trio of metrics that focus on deleveraging within the property industry. Failure to meet these criteria means no access to new bank loans. For heavily indebted property developers, this could set off a liquidity crunch similar to what Evergrande is facing.
The LionGlobal Short Duration Bond Fund currently has a slight exposure to China real estate at around 5.9%. The Fund’s overall real estate exposure is around 36.9%, with Singapore making up the largest geographical allocation at 26.5%.
Given that the Short Duration Bond Fund only makes up 35% of our Cash+ portfolio, your overall exposure to China real estate is much smaller.
What’s more, the Fund’s exposure is to stronger Chinese developers with manageable debt levels, healthy balance sheets, and prudent management. LionGlobal is of the view that the Evergrande fallout will be limited to weaker real estate developers with over indebted balance sheets.
Additionally, China, with its tightly controlled financial system, has the resources to prevent a systemic crisis in its property sector. As such, direct impact to the Short Duration Bond Fund is likely to be limited.
Learnings from previous short-term volatilities
Although the current volatility may be unsettling, it’s worth noting that Syfe Cash+ has successfully navigated such situations before.
Earlier this year, bond markets were tested by the China Huarong incident. Syfe Cash+ experienced a modest drawdown in April before recovering in May and June. In fact, the portfolio closed Q2 with an actual annualised return of 1.65%, much higher than the projected return of 1.5%.
This illustrates why we recommend investors take a slightly longer time horizon (beyond 1 – 2 months) with Syfe Cash+. While there may be modest drawdowns from time to time, historical returns show that as long as investors stay invested for at least a few months, any negative returns should be offset by positive returns.
The interest rate outlook
The US Federal Reserve has announced a taper of its bond-buying program as soon as November. Additionally, the Fed could conclude its tapering process around the middle of next year, as long as the US economic recovery remains on track.
This would likely pave the way for a rate hike which may come late next year or early 2023, according to Fed officials.
The US 10-year Treasury yield topped 1.56% shortly after the Fed announced tightening measures. While the yield has come down in recent days, market analysts expect Treasury yields to be choppy in the near term, and to potentially rise by the end of the year.
Will Cash+ be affected by rising interest rates?
Syfe Cash+ invests in bonds with short maturities and so are more defensive compared to other bond portfolios in an environment of rising interest rates. Taken together, the weighted duration of Syfe Cash+ is about 1.15 years (around 14 months). Given this short duration exposure, Syfe Cash+ is less impacted by any rise in long-term rates as compared to bond products with longer duration.
In the near term, movements in interest rates may affect the mark-to-market pricing of bonds within Syfe Cash+ and temporarily reduce returns. However, if the bonds are held to maturity, the par amount will be recovered. In essence, this negates any interest rate or price impact.
Moreover, even if interest rates continue to rise, the majority of your underlying bond holdings will mature in the next six to 12 months. Once that happens, your funds get reinvested in higher yielding bonds, which should allow for an upwards revision of the projected return.
Syfe Cash+ continues to provide projected returns of 1.5% p.a. with no lock-in, zero fees, and free withdrawals any time. These factors make it an attractive alternative to most traditional bank savings accounts.
For investors looking to park their spare cash for short periods beyond 1 – 2 months, Syfe Cash+ can provide relatively stable and higher projected returns than bank deposits.