In recent years, with the improvement of investors' financial management concepts and the cultivation of financial management habits, monetary funds have become a people-friendly version of idle money financial tools. However, the continuous decline in the return of the IMF in recent years is an indisputable fact.
I still remember that the annualized yield of Yu'e Bao in 2014 was as high as 4.83% (data source: Securities Daily report); in comparison, the current monetary fund income can be described as a significant decline. Wind data shows that as of April 28, 2020, 669 traditional currency funds in the wind open-end fund classification, the average 7-day annualized yield this year is 2.2612%, while the latest 7-day annualized yield is lower than 1.6749%, and the already lower yield of the monetary fund is still continuing to decline.
What is the reason for the sharp decline in the income of the IMF? Combined with the investment characteristics of the product and the recent market conditions, we may be able to find the answer.
A monetary fund is a publicly offered open-end fund that is specifically invested in a less risky money market instrument. Different from other types of open-end funds, monetary funds have high security, high liquidity and stable returns. Therefore, for the investment scope and investment restrictions of the monetary fund, the regulator also has very clear and strict requirements, and is committed to ensuring the safety and liquidity of investors' funds.
From the product contracts of many monetary funds, it is not difficult to see that the monetary funds mainly invest in bank deposits, bond repurchases, central bank bills, interbank certificates of deposit with a maturity of less than one year (including one year), bonds with a remaining maturity of less than 397 days (including 397 days), debt financing instruments of non-financial enterprises, asset-backed securities, and other money market instruments with good liquidity recognized by the China Securities Regulatory Commission and Chinese Min min bank.
In addition, among the many investment restrictions required by the regulator, there are four other aspects that may be more obvious to the investment income of the IMF:
1) Cannot invest in bonds with aa+ or below credit rating and debt financing instruments of non-financial enterprises;
2) The total proportion of financial instruments invested in institutions with a credit rating lower than aaa in the fund shall not exceed 10%;
3) The average remaining maturity of the portfolio must not exceed 120 days per trading day;
4) The balance of funds being repurchased by bonds shall not exceed 20% of the net asset value of the Fund.
What do these terms mean? Simply put, most of the money fund can only invest in bonds with aaa within 397 days, and cannot buy all 397 days of bonds, because it also needs to control that the average remaining maturity of the portfolio must not exceed 120 days, and the leverage operation cannot exceed 20%.
Referring to the above labels, roughly summarizing the yields of various short-term assets in the near future, it is not difficult to see that the yields of treasury bonds, financial bonds, aaa and a very small amount of aa+ bonds that monetary funds can invest in this year are really not high, compared with the yield level at the beginning of this year, the yield of various maturity varieties has fallen sharply, and most of the declines are above 100bp. This is why the yield of monetary funds has continued to decline recently.
Data source: wind, Zhongtai Asset Management, data as of April 28, 2020
You may soon be asking, why are these assets yielding so low in the near future?
2020 is destined to be unforgettable, the beginning of the year started with the hard mode, and a big epidemic suddenly arrived. While the COVID-19 pandemic has allowed people to wear masks and not go out, it has also significantly slowed down the pace of economic development. The risk aversion in the capital market has become more and more intense, the demand for bond asset investment has increased, and the overall bond yield has fallen sharply.
In order to eliminate the negative impact of the epidemic and support the real economy and people's livelihood, the central bank has increased its counter-cyclical adjustment since the beginning of this year, and has repeatedly reduced the RRR; and further adjusted it through a series of loose monetary policies such as open market operations and targeted refinancing and rediscounting. The capital side and market sentiment have a greater impact on bonds at the short end of the yield curve. In the case of a very sufficient money supply, the income of the main investment varieties of the money fund has fallen sharply, resulting in a further sharp decline in the yield of the money fund. Interest rates are expected to remain at a low level in the short term, and monetary fund yields may not reverse for the time being.
Since the yield of the monetary fund has dropped so sharply, if you want to get a higher return, what products can be replaced in the future?
As we all know, monetary funds are low-risk products. Following the law that risk and return are proportional, if investors want to pursue higher returns, they naturally need to bear certain risks. Judging from the performance of various types of funds in the past, bond funds may be used as an option, not only to provide these investors with the opportunity to obtain higher returns, but also to relative risk exposure and net value fluctuations will not be too high.
Of course, not all bond funds can meet this demand. There are also many kinds of bonds, such as interest rate bonds, credit bonds, convertible bonds, etc., of which interest rate bonds have the lowest risk, but not as high as the yield of credit bonds; and convertible bonds have relatively large fluctuations in all bond varieties due to their strong correlation with the stock market. Therefore, if you want to control a certain risk exposure and net value fluctuations, and find an investment variety other than a monetary fund for your spare money, a pure bond fund is an option.
According to the different investment scope of the existing pure bond funds in the market, they can be roughly divided into ultra-short bond funds, short bond funds, medium and short bond funds and medium and long bond funds or long bond funds. The biggest differences between these fund products and monetary funds are:
1) There is no restriction on the average remaining maturity of the portfolio, especially the remaining maturity of medium- and medium-term bonds and medium-term bonds or single bonds that can be invested by the long-term bond fund is also longer than that of the monetary fund;
2) Not limited by credit rating, you can appropriately sink some credit qualifications to obtain certain benefits;
3) The leverage ratio can reach 40%, which is higher than the 20% of the monetary fund.
Of course, the biggest difference between these types of bond funds is the difference in the remaining maturity of their investable assets. Generally speaking, in bond investment, the shorter the portfolio duration of the product, the better the liquidity, the smaller the price change when the yield fluctuates, and the more stable the net value trend.
Therefore, if your starting point is to find a product with a higher return than the currency under the premise of being willing to bear certain risks and net value fluctuations, in the current market environment, short-term and medium-term bond funds may be a good choice, which can take into account both liquidity and returnability, and the net value drawdown faced is relatively small.
About the Author
Beibei Zhang, Fund Manager of Zhongtai Qingyue Medium and Short Term Bonds (a/c), is currently the Deputy General Manager of Zhongtai Asset Management Fund Business Department, Master of Finance from Bond University in Australia, and has 13 years of experience in securities industry.
He has successively served as a trader and head of the transaction management department of Cathay Fund Management Co., Ltd., a fixed income investment manager, senior investment manager and chief investment manager of Shanghai Guotai Junan Securities Asset Management Co., Ltd., and a fixed income investment manager of Zhongtai Securities (Shanghai) Asset Management Co., Ltd.
The fund manager undertakes to manage and use the assets of the fund in good faith, diligence and responsibility, but does not guarantee the profitability of the fund, nor does it guarantee the minimum return, and the performance of other funds managed by the fund manager does not constitute a guarantee of the performance of one of its funds. Investments are risky. Investors should carefully read the fund's fund contract, prospectus and other legal documents when investing in the fund. The fund manager reminds investors of the "buyer's own responsibility" principle of fund investment, and invites investors to choose the fund products that suit them according to their own risk tolerance.