Bond funds under Central Provident Fund Investment resilient in H1 2011

Despite global economic turmoil, CPFIS-included funds only recorded a 1.89% loss on average for the 6-month period ended June 2011.

In a release, fund research firm Lipper of Thomson Reuters announced its findings on the performance of unit trusts and investment-linked insurance products that are included under the Central Provident Fund Investment Scheme as of 30 June 2011. Lipper is the “Funds Tracking Company” under the CPF Board’s Guidelines.

Despite the impact on the global markets from the sheer volume of unexpected events in the first quarter of 2011 – such as turmoil in the Middle East and the catastrophic earthquake in Japan – and of deteriorating fiscal conditions in Europe and North America during the second quarter, CPFIS-included funds proved resilient, recording a loss of only 1.89% on average for the 6-month period ended June 2011.

Average losses were 1.52% for CPFIS-included unit trusts and of 2.18% for ILPs, during the same period. Breaking these performance averages down by asset class, bond funds returned the highest with a gain of 1.83% and equity funds posted a loss of 2.94% during the first half of 2011, while mixed asset product offerings recorded a marginal loss of 0.78%.

The first quarter of 2011 experienced remarkable political and climatic events, both in their impact and magnitude, which influenced the global economic arena. Markets were embattled with rising geopolitical tensions in the Middle East, surging commodity prices, the disastrous earthquake and tsunami in Japan and its nuclear fallout, and ongoing efforts to rein in growth and inflation in the developing world. On the other hand, healthy corporate earnings in the US and a second round of quantitative easing (QE2) in the fourth quarter of 2010 buoyed up major US and European stock indices during the quarter.

In the second quarter of 2011, worsening economic data and fiscal imbalances in the US, persistent sovereign debt concerns in peripheral Eurozone economies, and stubbornly high inflation in high-growth emerging markets, put further pressure on risk appetites.

Rising risk aversion drove investors towards the safe-haven of fixed income products, particularly during the second quarter, as evidenced by the outperformance of lower-risk asset classes. The Citigroup World Government Bond index rose 4.00% during the first half of 2011, propped up by gains of 3.32% just during the second quarter, while the Citigroup High Yield Market index recorded a 4.93% positive return during the same period with gains of only 0.93% coming from the second quarter.

Rising risk aversion during the second quarter also helped stem the surge in commodity prices seen in recent quarters and ease inflationary pressures, contributing to mixed rather than outright negative returns (which were the case during the first quarter) among emerging markets. The MSCI World index recorded a net gain of 5.62% during the first half of 2011 (returning +0.67% for the second quarter), while the emerging markets component posted net gains of 1.03% during the same period.

According to Lipper analysts, the outlook for the second half of 2011 is cautiously positive. Investors are waiting to see how key economic indicators and events unfold - such as the US debt ceiling, the Eurozone sovereign debt crisis and the policy debate over inflation versus growth in growing economies.