In the past two years, more and more friends have begun to allocate overseas investment through public funds. Recently, the new QDII quota for public funds has also provided more investment opportunities for everyone.
As of the end of May, the cumulative amount approved by banking, securities, insurance, trust and other institutions was US$167.789 billion, an increase of US$2.27 billion from the end of April.
Some institutions have added a list of QDII quotas
Source: State Administration of Foreign Exchange, Guosen Securities Economic Research Institute; Data unit: US$ billion
In our communication with you, we noticed that:
Most small partners will show a high interest in overseas equity assets, such as the well-known US stock indices NASDAQ, S&P 500, or index products in emerging markets such as Vietnam and India, while the understanding of overseas bond funds is relatively limited.
In fact, overseas bond funds are also an important component of asset allocation.
However, it should be noted that there are significant differences between the overseas bond market and the Chinese bond market in terms of risk-return characteristics and market drivers. If we simply apply the investment experience of the domestic bond base directly to the QDII bond base, we may face some unexpected volatility risks.
Therefore, before we start to allocate overseas debt bases, we would like to talk to you about a few core issues that we must understand.
1. What are the risk-return characteristics of overseas bonds?
2. What is the allocation style of overseas bonds?
3. Is the exchange rate hedged and what is the difference?
4. Is there a pure treasury bond product and what is the investment value?
5. Why do we recommend it as part of asset allocation?
01
What are the risk-return characteristics of overseas bonds?
First of all, we need to understand that due to their unique risk-return attributes, the volatility of overseas bond funds is generally higher than that of the domestic bond market.
From the overall situation, by comparing the net value trend of China's medium and long-term pure bond fund index and QDII bond-based index in the past 10 years, we can find that the volatility of QDII bond base is relatively larger, and the total return during this period is significantly weaker than that of domestic medium and long-term pure bond funds.
Source: wind; Statistical period: January 1, 2014 to June 6, 2024
From the perspective of various net value indicators such as annualized returns, the QDII bond base underperformed the medium and long-term pure bonds by nearly 3 points, and the drawdown was also larger, and the overall performance was relatively weak.
Source: wind; Statistical period: January 1, 2014 to June 6, 2024
Looking further at the market, we can also pay attention to the performance of the top 15 QDII bond funds.
Since 2021, volatility has increased significantly in some high-yield bond funds, with about half of them recording negative returns. At the same time, the volatility of almost all QDII bond funds significantly exceeds the level of domestic medium and long-term pure bond fund indexes.
Source: wind; Statistical period: January 1, 2021 to June 6, 2024
Seeing the above data, you may wonder, why is the overseas bond base so risky? What has caused it to fluctuate and retrace in recent years that far outstrips the domestic debt base?
In our view, there are three main reasons for this:
1 The structure of participants is different
Overseas bond market participants are more diverse than those in China, including investors from all over the world, as well as institutions with different needs.
The combination of this diversified composition of participants, a highly active trading environment, and the large divergence of different investors on bond price trends has led to the price volatility of overseas bond markets being amplified to a certain extent.
2 The macro interest rate environment is different
The country as a whole is now in a relatively stable downward environment with a central interest rate; In contrast, the interest rate environment in the United States has been more volatile, especially since the beginning of the interest rate hike cycle in 2021, which has continued to fluctuate upward.
Since the interest rate is the denominator of the bond price, the relationship between the two is inverse, that is, when the interest rate rises, the bond price falls, and the volatility of this interest rate will also directly affect the fluctuation of the bond price.
Source: wind; Statistical period: January 1, 2014 to June 6, 2024
3 Bond rating systems and bond types are different
QDII bond funds have a relatively broader and more flexible allocation strategy, they are not limited to high-rated bonds, but cover a wider range of ratings and are less restrictive to the sector.
This strategy allows the fund to hold a certain percentage of low-rated, high-yield bonds, and the addition of these assets undoubtedly increases the volatility of the portfolio.
The allocation of domestic mainstream bond funds is mainly concentrated in the 3A-rated bonds with the highest credit ratings, so the volatility is relatively stable.
02
What is the allocation style of overseas bond bases?
When considering investing in a domestic bond fund, people tend to pay attention to its bond strategy and style first.
- Is it interest rates, credit strategies, or a balance of both?
- If it is an interest rate strategy, what is the proportion of trading and allocation positions and how often is it?
- If it's a credit strategy, how much does it sink in credit?
Again, it is important to understand these before investing in QDII bonds.
At present, among the public QDII bond funds in the market, the bond style is still relatively concentrated, mainly inclined to invest in Chinese-funded US dollar bonds + US Treasury bonds.
For example, the following are two typical QDII bond allocations.
QDII Debt Base Case
Source: wind; Data as of the first quarter of 2024
It can be seen that except for large international banks such as Barclays, most of the other credit bond entities are from China, but these bonds are issued in the US market, although the issuers are the same, but due to the differences in the issuance market and pricing environment, the performance may also be different from that in China.
There are also a small number of QDII bond funds that invest in non-Chinese pure foreign dollar bonds, but such funds are relatively rare.
In fact, there are more pure foreign foreign debt investment funds in the category of China-Hong Kong Mutual Recognition of Funds (MRF), and this difference may stem from the allocation of research resources and research priorities of different companies.
However, the management fees and subscription fees of MRF are relatively high, and the convenience of subscription and redemption may not be as good as that of QDII public bond funds, which still has its own advantages and disadvantages.
03
Is the exchange rate hedged or not, and what is the difference?
Many QDII bond funds use financial instruments such as foreign exchange futures to hedge the risk of exchange rate fluctuations, with the aim of making the fund's income more stable and pure, and reducing the impact of exchange rate fluctuations on investment returns.
But there are also some costs to hedging exchange rates:
1 The hidden cost of locking up foreign exchange
When the U.S. dollar is in an appreciation cycle, the hedged exchange rate will cause the fund to miss out on the additional gains from the appreciation of the U.S. dollar.
This can be illustrated by an exaggerated assumption (a simple example, without calculating any costs):
- Assuming today's exchange rate is 6.5:1, we spend 650 RMB (i.e. 100 USD) to buy a QDII fund and invest in USD bonds
- A year later, due to poor market performance, the account equity still maintained its value of $100, but the exchange rate rose to 7.5:1
- At this time, we redeem the fund and get back 750 yuan. In the case of no profit from bond investment, we got an extra income of 750-650=100 yuan
- However, if the fund has locked the foreign exchange in advance, the income of 100 yuan will not be obtained
2 The cost of shorting
In recent years, the foreign exchange futures market is usually in a discounted state, that is, the futures price is lower than the spot price. Therefore, there are some additional costs to be borne by shorting, which is around 0.5-1.5% per annum.
Therefore, even though exchange rate hedging can reduce the risk of exchange rate fluctuations, it will also sacrifice a part of the return, which is still a significant loss for bond funds with low annualized returns.
For our own selection of funds, we can check the futures position of the fund (generally in the quarterly report of the fund), and obtain the ratio of exchange rate risk hedging by calculating the market value of the contract/net value of the fund.
Quarterly data of selected funds
Source: wind; Data as of the first quarter of 2024
Most of the existing QDII bond bases have foreign exchange locking operations to manage the risk of exchange rate fluctuations. The hedging ratio of these funds varies, up to about 90%, which means that only 10% of the assets are exposed to exchange rate risk, but the corresponding cost of locking up foreign exchange will be relatively high; Most funds opt for a hedge ratio between 20-50% to balance risk and cost.
Therefore, if you want to operate more carefully and expect the US dollar to continue to appreciate, then you can choose a fund with a smaller foreign exchange lock ratio, which is expected to obtain some additional income from exchange rate changes.
04
Is there a pure U.S. Treasury product, and what is the investment value?
In the current context of high U.S. Treasury yields, some investors will also consult whether there are QDII bond funds in our market that invest in U.S. Treasury bonds with full exposure to U.S. Treasury bonds out of concern about the high volatility and default risk of credit bonds.
In fact, there is no such fund product in the public market for the time being. This is mainly because pure U.S. Treasury investments may not be attractive enough from a price-performance perspective.
For example, from the chart below, since the Fed began its interest rate hike cycle in 2021, the S&P U.S. Government Bond Index has had average cumulative returns and has been highly volatile.
Source: wind; Statistical period: December 1, 2017 to June 6, 2024
However, overseas credit markets offer more attractive credit spread yields than government bonds.
According to the latest data, even AAA-rated corporate bonds have a credit spread of 39 bps, which is higher than the 12 bps of China Bond AAA, and the credit spread of A-rated corporate bonds is as high as 76 bps. As for high-yield bonds, credit spreads have fluctuated at a high of 4% for a long time.
Source: wind; Statistical period: January 1, 2010 to June 6, 2024
It can be seen that by selecting credit bonds with strong solvency, investors can pursue relatively considerable interest rate differential returns, or more cost-effective investment options than pure government bonds.
This is also the reason why most QDII bond funds tend to adopt a combination of treasury bonds and credit bonds, rather than a single allocation of treasury bonds.
05
Since the volatility of overseas bond bases is relatively large, why is it recommended as a part of asset allocation?
Although overseas bond bases are relatively volatile, they have the advantage of low correlation with major asset classes, and can be used as a part of asset allocation, playing a role in hedging risks and smoothing volatility in the portfolio.
The correlation of the QDII bond base with other major asset classes
Source: wind; Statistical period: January 1, 2014 to June 6, 2024
More importantly, although the yield of the QDII bond base may be lower than that of the domestic bond base in the long run, it is more elastic, for example, when the US financial conditions are in a relatively loose cycle (see the chart below 2015-2017, 2019-2020), it can strive for higher yields in stages.
Source: wind; Statistical period: January 1, 2014 to June 6, 2024
At present, the United States has maintained a high interest rate environment for three consecutive years. According to the information displayed in derivatives pricing, there is basically a consensus in the market that there is a relatively large probability of implementing interest rate cuts in Q3 or Q4, and the bond market may usher in capital gains opportunities in the future. Therefore, you can pay attention to a strategic placement of overseas bond funds in order to benefit from the potential upside of the bond market when the rate cut cycle arrives.
So, the last question comes: how to choose the right QDII bond base? If you are sensitive to risk, we recommend that you refer to these three filtering rules:
1. From the net value of the fund
Preference is given to funds with low historical drawdowns and low volatility. This type of fund is usually more conservative in its investment strategy due to the limitation of product positioning, and will not make particularly aggressive operations in terms of bond type, credit and duration, and the future drawdown is relatively controllable.
2. Judging by the name of the fund
Consider avoiding funds with a "high yield" name/label. Because they may be too aggressive in terms of credit risk, their volatility is deep and may even be similar to that of equity assets, which may not necessarily meet the investment risk expectations of prudent investors.
It needs to be reminded here that many small partners may confuse "medium and high returns" and "high returns", and the difference between the two is still very big. The risk of the former is relatively controllable, and most of the bonds invested in are well-known and have stable cash flows; However, the latter's high returns are likely to include a large proportion of entities with risky operations and long-term negative profits, which need to be carefully considered.
3. Judging by the position information
Funds with moderate or short duration are preferred, and their visible holdings are mainly from reputable companies.
Although the Fed's interest rate cut expectations are uncertain and volatile, U.S. bonds may fluctuate greatly in the short term. However, in the long run, when the interest rate cut cycle starts, U.S. bonds are still worth our continued attention.
Article source: GF Fund Investment Advisory Team丨Risk Warning: GF Fund carries out fund investment advisory business based on the principles of diligence, honesty and trustworthiness, and priority for investors' interests, but it does not guarantee that each investment advisory portfolio will be profitable, nor does it guarantee a minimum return. Investors participate in the fund investment advisory business, and there is a risk of loss of principal. The risk characteristics of a fund's portfolio strategy are different from those of a single fund product. The performance of each portfolio strategy under the fund investment advisory business is only representative of past performance and is not indicative of future performance, and the income created for other investors does not constitute a guarantee of business performance. As the fund investment advisory business is still in the pilot stage, there is a risk that the pilot qualification of the fund investment advisory institution will be cancelled and it will not be able to continue to provide services. Before investing, please carefully read the investment advisory agreement, strategy brochure and other legal documents, fully understand the details and risk characteristics of the investment advisory business, choose a portfolio strategy suitable for you, and invest cautiously