252) Bond Fund Performance When OPR Reduced

252) Bond Fund Performance When OPR Reduced

Have you wondered what happens to a typical Unit Trust Bond fund when the Bank Negara Malaysia reduces the Overnight Policy Rate (OPR)?

See for yourself the performance over the last 4 OPR reductions.

Source: https://www.bnm.gov.my/index.php?ch=mone&pg=mone_opr_stmt

1) OPR reduced 0.25% from 3.25% to 3.00% on 7 May 2019
2) OPR reduced 0.25% from 3.00% to 2.75% on 22 Jan 2020
3) OPR reduced 0.25% from 2.75% to 2.50% on 3 Mar 2020
4) OPR reduced 0.50% from 2.50% to 2.00 on 5 May 2020

1) OPR reduced 0.25% from 3.25% to 3.00% on 7 May 2019

A typical bond fund performance from 1 Apr 2019 to 31 May 2019.
The Bond fund performance increased more than previous rates.

2) OPR reduced 0.25% from 3.00% to 2.75% on 22 Jan 2020

A typical bond fund performance from 1 Jan 2020 to 29 Feb 2020.
The Bond fund performance increased more than previous rates.

3) OPR reduced 0.25% from 2.75% to 2.50% on 3 Mar 2020

A typical bond fund performance from 1 Feb 2020 to 31 Mar 2020.
The Bond fund performance maintained for a short while and then turned negative. This could be the effect of foreign bond investors taking profit and sell off their bonds after the recent 3 OPR reductions in 2020. The Ringgit depreciation against other currencies also affect the bond values.

Foreigners sold RM17.8b Malaysian bonds, equities in March — highest since May 2018
https://www.theedgemarkets.com/article/foreigners-sold-rm178b-malaysian-bonds-equities-march-%E2%80%94-highest-may-2018-0

For more readings on what affects bond prices link below:
http://highlevelrules.blogspot.com/2020/03/241-factors-affect-bond-prices.html

4) OPR reduced 0.50% from 2.50% to 2.00 on 5 May 2020

A typical bond fund performance from 1 Apr 2020 to 6 May 2020.
The Bond fund performance increased more than previous rates with more bond investors expected further OPR rate cuts.

News published on 3 Apr 2020 on BNM Annual Report 2019: 2020 Monetary policy to support economic growth amid subdued inflation.
https://www.theedgemarkets.com/article/bnm-annual-report-2019-2020-monetary-policy-support-economic-growth-amid-subdued-inflation

News published on 23 Apr 2020 on BNM expected to cut OPR by another 75 basis points.
https://www.theedgemarkets.com/article/bnm-expected-cut-opr-another-75-basis-points-%E2%80%94-cgscimb

News published on 30 Apr 2020 on BNM seen slashing OPR by 50bps.
https://www.theedgemarkets.com/content/evening-5-bnm-seen-slashing-opr-50bps-0

Bond Fund Performance since 1 Jan 2020

A typical bond fund performance from 1 Jan to 6 May 2020 when there were 3 OPR reductions in 2020.

Bond Fund Performance since 1 Apr 2019

A typical bond fund performance from 1 Apr 2019 to 6 May 2020 when there were the 4 OPR reductions.

Bond Fund Performance since 10 May 2010 to 6 May 2020

Bond Fund = 68%
12 Month FD = 36%

We can summarize that Bond Funds gives a better return than Fixed Deposit in the longer term. Furthermore, bond funds have more fluctuations due to other factors affect the bond prices.

Please contact and discuss with your Financial Consultant on the financial options available for you.

Other Related Articles

241) Factors Affect Bond Prices

http://highlevelrules.blogspot.com/2020/03/241-factors-affect-bond-prices.html

239) Bond Specification & Calculation

https://highlevelrules.blogspot.com/2020/03/239-bond-specification-calculation.html

230) Differences between investing into Bond Market vs Bond Fund 

http://highlevelrules.blogspot.com/2019/07/330-bond-market-vs-bond-fund.html

222) Does Bond Fund Move Opposite to Equity Fund?
http://highlevelrules.blogspot.com/2019/03/222-does-bond-fund-move-opposite-to.html

22) Bond Price Moves Opposite to Bond Yields
https://highlevelrules.blogspot.com/2017/06/bond-price-moves-opposite-to-bond-yields.html

48) Money Market Fund vs Bond Fund
http://highlevelrules.blogspot.com/2017/07/money-market-fund-vs-bond-fund.html

61) Unit Trust Bond Fund Vs Fixed Deposit
http://highlevelrules.blogspot.com/2017/07/unit-trust-bond-fund-vs-fixed-deposit.html

251) How Total, Annual & Annualized Returns are Related

251) How Total, Annual & Annualized Returns are Related

How many of you are confused between the different Returns terms used?

a) Total Return
b) Annual Return
c) Average Total Returns
d) Annualized Return

Have you wondered how the Returns are related?

The graph above shows the relationships between the different returns terms.

The Black fluctuating line is the investment performance.
The 3 Green straight joining lines are the 3 Annual Returns.
The Red line is the Total Return.
The Blue sloping upward exponential curve is the Annualized Return. It is sloping because the effect of compounding. The value increases faster as over the years.

Let us look at the relationships below and understand the differences.

FV = PV(1 + i)^n
FV = PV((1+i1)(1+i2)(1+i3)…(1+in))

(1+TR) = (1 + i)^n
FV = PV(1 + TR)
TR = (FV – PV)/PV
where
FV = Future Value (End Value)
PV = Present Value (Begin Value)
i = Annualized Return
in = Annual Return for year n
n = No of years
TR = Total Return for n years

A) Total Returns (TR)

From the basic formula of investment:

Total Return = (End Value - Begin Value)/Begin Value
TR = (FV - PV)/PV

For Total Return, the period can consist of 1 year or many years. It calculates from the beginning to end of the investment.

If the period is only 1 year, then it is the same as Annual Return.

B) Annual Return (in)

Annual Return basically means the investment return for only 1 year period. Each year will have its own Annual Return.

Example: 

i1 = Annual Returns for 1 Jan 1st year to 31 Dec 1st year.

i2 = Annual Returns for 1 Jan 2nd year to 31 Dec 2nd year. 

i2019 = Annual Returns for 2019 means the investment return from 1 Jan to 31 Dec 2019. 

i2020 = Annual Returns for 2020 means the investment return from 1 Jan to 31 Dec 2020.

It is the same as Total Return for 1 year period.

TR1 = i1 = (FV1 - PV1)/PV1

Annual Return for 2019  = (Value in 31 Dec 2019 - Value in 1 Jan 2019)/Value in 1 Jan 2019

i2019 = (FV in 31 Dec 2019 - PV in 1 Jan 2019)/PV in 1 Jan 2019

The Total Returns for many years are the compounded value of many Annual Returns. 

Total Return for n years:

1+TR = (1+i1)(1+i2)(1+i3)...(1+in)

C) Average Total Returns (ATR)

Average Total Return is simply the Total Return divided by the number of years of the investment.

ATR = TR/n

D) Annualized Returns (i)

Annualized Returns is the Total Return that is re-scaled to a period of 1 year. 

This means that if you keep compounding the same Annual Return value, you will get the Total Return.

(1+i)^n = (1+i1)(1+i2)(1+i3)…(1+in)  = (1+TR) 

Let us apply an example to the formulas.

You invested $1,000 on 1 Jan 2017.

In 2017, the Annual Return = 5%

In 2018, the Annual Return = 8%

In 2019, the Annual Return = -4%

a) What is the Total Return rate, TR?

b) What is the Average Total Return, ATR?

c) What is the Annualized Return rate, i?

d) What is the Investment Value after 3 years on 31 Dec 2019, FV?

PV = $1,000
i1 = 5%
i2 = 8%
i3 = -4%
n = 3 years

a) What is the Total Return rate, TR?

Total Return for 3 years:

1+TR = (1+i1)(1+i2)(1+i3)

1+TR = (1+5%)(1+8%)(1-4%)

1+TR = (1.05)(1+08)(0.96)

1+TR = 1.08864

TR     = 0.08864 = 8.864%

b) What is the Average Total Return, ATR?

ATR = TR/n

ATR = 8.864%/3

ATR = 2.955%

c) What is the Annualized Return rate, i?

(1+i)^3 = (1+i1)(1+i2)(1+i3)

(1+i)^3 = (1+5%)(1+8%)(1-4%)

(1+i)^3 = (1.05)(1+08)(0.96)

(1+i)^3 = 1.08864

(1+i)     = Root 3 of 1.08864

(1+i)     = 1.028714

i            = 0.028714

i            = 2.8714%

Note: Annualized Return is not the same Average Total Return. 

There are many who confuse between ATR and AR.

d) What is the Investment Value after 3 years on 31 Dec 2019, FV?

At the end of the investment period, you want to know what is the $ value you have.

You can get the Future Value, FV from any one of the formulas below:

FV = PV(1 + i)^n
FV = PV((1+i1)(1+i2)(1+i3)…(1+in))

FV = PV(1 + TR)

Formula 1:

FV = PV(1+i)^n

FV = 1000(1+2.8714%)^3

FV = 1000(1.028714)^3

FV = 1000(1.08864)

FV = 1088.64

Formula 2:

FV = PV(1+i1)(1+i2)(1+i3)

FV = 1000(1+5%)(1+8%)(1-4%)

FV = 1000(1.05)(1+08)(0.96)

FV = 1000(1.08864)

FV = 1088.64

Formula 3:

FV = PV(1 + TR)

FV = 1000(1+8.864%)

FV = 1000(1.08864)

FV = 1088.64

Hope the formula and calculation example above helps you to understand the relationships between the different returns terms used in investment.

For more explanation, go to these links:

179) Unit Price and Number of Units Growth Rates Effect on Investment Values.

https://highlevelrules.blogspot.com/2018/06/unit-price-and-number-of-units-effect.html

209) Expanded Formula for Investment

https://highlevelrules.blogspot.com/2018/09/expanded-formula-for-invesment.html

250) Distribution Yield vs Total Return

250) Distribution Yield vs Total Return

Have you wondered what are the differences between Distribution yield and Fund Performance?

There had been many confusion between Distribution Yield and Fund Performance. Both percentages are available in fund reports and that creates more confusion to those who are not aware of the differences.

Let us start with a simple case study.
Assume no charges for simplicity.

15 Jan 2019 unit price = $1.05
15 Jun 2019 unit price = $0.80
30 & 31 Dec 2019 unit price = $1.00
1 Jan 2020 unit price = $1.00

Adam invested $1,000 on 15 Jan at $1.05 per unit and has 952.38 units.
Bill invested $1,000 on 15 Jun at $0.80 per unit and has 1,250 units.
Charles invested $1,000 on 30 Dec (before distribution) at $1.00 per unit and has 1,000 units.

On 31 Dec, the fund price per unit is $1.00.
The fund declared distribution of $0.10 per unit.

Distribution yield
= Distribution amount / Unit Price after distribution
= 0.10/(1.00-0.10)
= 0.10/0.90
= 11.11%

Now, let's look at what the investors will receive as their distribution payout.
Distribution = $0.10 per unit.

Adam: 952.38 units x $0.10 = $95.24
Bill: 1,250 units x $0.10 = $125
Charles: 1,000 units x $0.10 = $100

What is the return from the distribution?
Return from Distribution = distribution payout/Investment

Adam: $95.24/$1,000 = 9.52%
Bill: $125/$1,000 = 12.5%
Charles: $100/$1,000 = 10%

What about the remaining Asset Value of the investors in their funds?
After distribution, the unit price is $1.00 - $0.10 = $0.90

Adam: 952.38 units x $0.90 = $857.14
Bill: 1,250 units x $0.90 = $1125
Charles: 1,000 units x $0.90 = $900

What are the investors' investment Total returns?
Total Return = (End Value - Begin Value + Distribution)/Begin Value

Adam: ($857.14 - $1,000 + $95.24)/$1,000 = -4.76%
Bill: ($1,125 - $1,000 + $125)/$1,000 = 25%
Charles: ($900 - $1,000 + $100)/$1,000 = 0%

This is to show that the distribution yield is at 11.1% for all investors.
However, only Bill made positive returns because he invested when the unit price was lower.
Even though Adam received distribution, he still lost 4.76%.

What if all reinvested their distributions?
All will have extra units in their investment.

Adam: $95.24/$0.90 = 105.82 units
Bill: $125/$0.90 = 138.89 units
Charles: $100/$0.90 = 111.11 units

New Total units
Adam: 952.38 + 105.82 = 1,058.20 units
Bill: 1,250 + 138.89 = 1388.89 units
Charles: 1,000 + 111.11 = 1,111.11 units

What if another investor, Darren, invested $1000 on 1 Jan 2020 (after distribution).
How many units will he gets?

Darren: $1,000/$0.90 = 1,111.11 units

Therefore, there is no difference between Charles (invested before distribution) and Darren (invested after distribution). Both will have 1,111.11 units each.

Below is the Summary in a Table format.

For more information, please consult your Unit Trust Consultant.

226) No Distribution? Did the Fund Make Money?

https://highlevelrules.blogspot.com/2019/06/226-no-distribution-did-fund-make-money.html

Click the link below to know the differences between Dividend vs Distribution.
http://highlevelrules.blogspot.com/2017/11/dividend-vs-distribution.html

Click the link below to know the Benefits of Distribution.
http://highlevelrules.blogspot.com/2017/11/benefits-of-distribution-in-unit-trusts.html