Fixed-Maturity Products Maintain Appeal in Asia
September 28, 2020 — Singapore
Managers must innovate to create new solutions that suit current market conditions
Demand for fixed maturity products (FMPs) has not tapered off in Asia, with yield-starved investors continuing to seek stable income and regular payouts over fixed terms, amid the low-interest-rate environment. Investors in markets like Singapore, Hong Kong, and Taiwan, in particular, are seeking FMPs in times of heightened market volatility.
Distributors in the region tend to like FMPs as these have fixed tenures, and investors can typically get back their investments plus all income distributions if there are no defaults during the fixed tenure to maturity, which typically is around two to three years. Hence, it will be easier for them to manage the expectations of their clients.
As FMPs come with fixed lock-in periods and limited investment windows, these closed-end bond funds are sometimes perceived as more appealing than open-end funds, which investors can invest in anytime.
Some managers and distributors are, however, concerned that the prolonged low-interest-environment will put pressure on FMPs’ returns, while the uncertainty from COVID-19 could potentially affect fundraising for new FMP launches. There could be concerns that these products might fetch lower yields this year compared to last year. Some managers Cerulli spoke with said yield is something they watch out for if they were to launch FMPs; others said some distributors want to see how things pan out before launching new FMPs.
Rising bond defaults poses another challenge for managers seeking to launch new FMPs. Some FMPs have been affected by bond defaults in China, and this could undermine confidence in such products. This is rather worrying, given that a significant number of FMPs rolled out since 2019 in Hong Kong reportedly invest in U.S.-denominated Asian bonds, which are heavily dominated by Chinese issuers.
In addition, some FMPs are investing in lower credit rating bonds or bonds with durations longer than those of the funds, to achieve higher returns in this low-yield environment. This might add another layer of risk for investors in these products.
Still, some managers have gone ahead with their launch plans. In addition, private banks in Asia continue to see strong demand for their recently launched FMPs from their clients.
Over the past year, managers have been looking at ways to be more innovative in their new FMP launches, with some incorporating environmental, social, and governance (ESG) features, some shortening or stretching their fixed-maturity period, and others extending their risk exposures.
“To tap on the demand for FMPs in Asia, managers must strive to be more innovative in developing new solutions that suit current market conditions and be able to differentiate their offerings in a competitive marketplace,” says Shannen Wong, senior analyst with Cerulli. “Managers also need to consider the risk profiles of their FMPs amid rising bond defaults. Nevertheless, Cerulli believes that FMPs will continue to be featured on managers’ and distributors’ product promotion plans in the long term, due to Asian investors’ strong preference for products that can provide them with stable income streams.”