Aging Asia Investors Turn to Income Funds to Preserve Nest Eggs

Asian investors, spooked by a pandemic with seemingly no end in sight, are flocking to a growing segment of the mutual fund industry — income funds backed by corporate debt that pay out monthly.

Workers preparing for retirement in Hong Kong and Singapore have turned to income funds that offer regular payments instead of taking their pension savings in a lump sum. That’s becoming especially popular as central banks’ money-printing practices make it harder to preserve the value of cash.

“Income products that provide regular payouts have been in vogue,” said Sally Wong, the chief executive officer at the Hong Kong Investment Funds Association. “The aging population in Asia, as well as the low interest rate environment, are key contributing factors.”

Asia’s fixed-income funds particularly stand out. Such funds sold in Hong Kong and Singapore grew by $1.36 billion to $45 billion in June, according to Morningstar. They generated average cumulative returns of about 1.2% year-to-date as of July 22 — a solid performance given many global equity funds are in the red.

The region’s faster-than-anticipated reopening from the coronavirus pandemic is at the heart of the market’s new-found allure. From Korea to China, the largest companies are benefiting from a gradual restart of factories, financial services and consumer spending in recent months.

Central bank stimulus has also played a role, flooding markets with liquidity and depressing yields on traditional debt. Investors are opting to take their money in regular installments rather than parking their savings in a longer-term vehicle when interest rates may decline further.

Flow Growth

Asia fixed income fund net flows recover after March dip

Source: Morningstar

“With Asia recovering first from the virus, the popularity of Asia fixed-income funds is rising,” said Elisa Ng, head of Hong Kong & China funds at JPMorgan Asset Management. “The top-selling funds in Hong Kong now all have regular monthly payouts. Because of the low interest rate environment, if you put your money in a savings account, you’re basically getting nothing.”

Asian-focused funds backed by investment-grade securities offer a better balance of income and stability, asset managers say. JPMorgan’s Asia Total Return Bond Fund, which is underpinned by investment grade debt, currently generates an annual yield of about 4% to 5%.

“Asian economies are looking better than broader emerging markets,” said Paul Kalogirou, multi-asset client portfolio manager at Manulife Investment Management. “Asia’s fixed-income scene is pretty attractive.”

The bulk of Asian fixed-income funds are denominated in U.S. dollars, a positive given ample liquidity in the market. The fact that Asia fixed- income funds offer higher yields than U.S. peers has also attracted investors, said Wing Chan, director of manager research practice at Morningstar.

Fixed income funds globally also see slow recovery in net flows

Source: Morningstar

Income funds often hold stocks offering dividends, or bonds with coupon payments, or a combination of both. To seek higher yields, investors can buy into global high-yield funds, which are backed by below-investment grade or junk bonds. These have on average generated yields of 6%-7.5%, but can be riskier.

“Asia fixed-income funds are performing better than global high-yield funds,” said Chan.

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