A Safe, Passive Effort Fixed Income Strategy Embedded into One Fund for Singaporeans.

This time of the year, Singaporeans would be wondering where are the safe places to put their money to work so that they can earn higher returns.

Safe and high returns.

Perhaps this is not Singaporean’s favorite but everyone’s favorite. Throw in passive and it will be best.

Safe, passive and high returns.

Just recently I got a request: “Kyith, can you introduce me to some safe income funds. I don’t want to spend all my time in the future timing 6-month Singapore Treasury bills.”

It seems people can get tired of the need to keep tabs of what yields high enough but still safe.

I told my friend: “Just invest in an index tracking Global Aggregate Bond fund hedge to Singapore dollar lah.” I realize after I said that perhaps what most are looking for is a Short-Duration Bond fund.

Back in 2019-2020 when the interest rate is very low, many Robo-advisers were competing to launch cash management portfolios. These were essentially made up of two to four short-term bond unit trust and money market unit trusts. When interest rate was extremely low, they recommend you to take some risk so that you can earn a higher return. When some Chinese property fixed income issuers were at risk of default, people got worried. Some of the cash management portfolio investors cry a little father and mother because they were shock the returns were not 4-5% but that it could be negative.

If you ask me today if those cash management portfolios were poor recommendation, I would disagree.

I think if you one something that retains its principal value, passive, doesn’t have concentrated security risk, can deploy a large chunk of capital without worrying about cap, a short-term fixed income unit trust is pretty good even today.

If you view that through my lens

If you view it through your lens, you might wonder WTF is the appeal of these unit trust versus your Singapore Tbills, OCBC 360 accounts, Astrea bonds and what not.

Well, readers know my most shitty skill is to explain things succinctly so I am gong to take the length of this article to share broadly what I think about it.

I am going to talk about two of Dimensional’s short-term fixed income unit trust:

1. Global Short Fixed income Fund (SGD hedged, USD, EUR, GBP, JPY)
2. Global Short-Term Investment Grade Fixed Income Fund (SGD hedged, USD, EUR, GBP, JPY)

I choose to talk about them because

1. I dealt with them the most.
2. I have the most data on them.
3. Matches the topic that I would like to discuss today.
4. We have a 100% fixed income portfolio at work that we recommend for some of client’s financial goals. If you are a client and happen to read my blog, you get to hear how I talk about them compare to how your adviser talk about them.
5. Some of our associate advisers and client advisers read my blog and they might find it useful.

If you have invested in a short-term bond fund that has kind of similar characteristics, I think some of the attributes we talk about would also be applicable to what you own. You may understand what you invested better and have a greater peace of mind.

What Kind of Goal This is Most Suitable For?

There are no investment securities that fit all purposes.

If you are conservative, risk averse, want to take some risk, but not a whole lot of risk, don’t want to spend all your time hunting for best fixed deposit returns, tired of that kind of life, doesn’t have a clear financial goal, not sure about your time horizon, then these short-term bond unit trust is suitable for you.

Technically, these are for the short term financial goals where you need the money in three years time, but want a better way to grow your money.

These are the two kind of goals that may find this useful.

Dimensional’s Active Fixed Income Strategy

I think in Singapore, you don’t have a lot of options for a short-duration market cap indexing constant-duration fixed income strategy.

The closest is probably the Nikko ABF Bond Fund. This is a quasi-government bond fund that is SGD denominated. Unfortunately the average duration is 8.3 years (from ABF Bond fund’s factsheet) which will put it closer to the duration and maturity of a Global Aggregate Bond fund.

Not a lot of index fixed income portfolio of bonds that is denominated in SGD then.

A traditional index fixed income fund tries to replicate the ongoing changing composition of the securities in the market, with certain constraints. A short-term, Singapore, government fixed income index will try to replicate the performance of an entire group of fixed income securities in Singapore that is government issue that has maturity not more than certain number of years. If you invest in such a portfolio, you get the performance as if buy and hold such a basket of fixed income security. As one fixed income security in the basket mature, they buy one longer maturity out.

Most of the shorter term fixed income funds that is available to Singaporeans then are more active strategies. The unit trust have a certain mandate, such as owning short term, SGD denominated, government issued fixed income. But how diversified, what is actually owned will be determined by the human fund manager. The fund manager has a certain philosophy balanced between trying to get returns, not buying bonds that will default, being diversified enough. Your returns will be based on what the unit trust own at various points when you invest.

Your fate is driven by what the human fund manager does but realistically the returns are limited by the fixed income duration, credit quality constrains.

Dimensional’s fixed income strategy lies someone in the middle between just holding a portfolio of fixed income securities with a constant duration and a manager that has a certain philosophy how they see the macro-economic markets, how it influences their fixed income selection, and what do they do.

In my eyes, people mistaken them to be more passive then it is.

Suppose I don’t have an idea how macro-economic is going to affect the fixed income market in the next instant, next day, next week or forever. I know if X happen, then fixed income will be like this. Or if I know X happen, which will affect Y, and then fixed income will be affected in this way. But I have no way of knowing when, the magnitude of X and Y, or how long it will persist.

So I can’t factor those things in a systematic strategy.

I do want to do a few things that are within my control:

1. I want to control the quality of fixed income that I want to hold. For example, I don’t want to take too much risk. I want to limit the kind of fixed income in this to say AAA, AA, and A rated securities. This stops my exposure to the mid-investment grade and below fixed income.
2. I want to control the sensitivity of my fixed income portfolio to interest rate. For example, I limit the maximum duration of the fixed income to not more than 5 years. I will limit the average duration of the entire fixed income portfolio to not more than 3 years. This means that if the market interest rate moves 1%, the short-term unrealized losses on the basket of fixed income securities is -3% (as a rule of thumb). The portfolio won’t take the big losses of something like a 20-Year TLT which in this rule of thumb would be down -15% roughly. I would also not benefit from it.
3. There is a lot of fixed income securities in the world. I know that if I buy fixed income securities when the yield curve is steep, hold them for 1-2 years then sell them, then take the money to find another fixed income that has a steep yield curve and buy them and hold them for 1-2 years, rinse and repeat. This will earn more return when the yield curve is steep. But if the yield curve is flat, instead of buying a lengthy maturity fixed income, I will buy a fixed income that has a short maturity left because there is no good gains from the roll down of the yield curve. I will look at the universe of fixed income securities that qualifies for #1 and #2 and find those that have this characteristics.
4. I will look at the current credit spreads of the fixed income, relative to history to see if it is tight or wide. If it is wide, it is more risky but higher probability that I am rewarded for buying more risky fixed income. I will allocate more to those fixed income in the universe that has a wide spread versus historical than the more narrow ones.
5. I don’t want the risk that a single sector, single issuer default to kill my portfolio, so therefore I want to be adequately diversified by holding a basket of securities issue by different issuers, limiting the max for each country, issuer and sector.
6. I will monitor, buy and sell based on #1 to #5.

What I put above is not rocket science. If you are investing in cash or fixed income yourself, you would have consider these things. What you are doing is not passive and you are the portfolio manager taking an active approach.

I wonder how many considers this but also how many stuck to a systematic approach as a human being.

This is a rough, good example, of Dimensional’s systematic but active approach.

Personally, I don’t have access to the markets for a universe of fixed income securities. I have very primitive knowledge about what to watch out for when managing a portfolio of fixed income securities. Most importantly, I don’t want my life to be taken over reviewing fixed income securities.

If you invest in a fixed income unit trust like Dimensional, you delegate these stuff to the fund manager. It also means that you are less willing to hold a basket of securities but also want to see if you can eek out some long term gains from term and credit premium should the opportunity arises.

Let’s Go Through Some Details of the Two Dimensional Funds

For most of the rest of the article, I will spend my time explaining some of the information from the table below:

I have summarized the permanent and short term details of the Dimensional Global Short Fixed Income Fund and Dimensional Global Short-Term Investment Grade Fixed Income Fund, as well as the actual performance above.

You will see like two repeated panels. the one to the left are the information of the funds that is in USD and the one to the right are the funds that are hedge to SGD. Essentially, they are the same but with different currency, the returns and net yield would be different (as you can see in the actual performance). If you are a client of Providend and you happen to have a goal that is in EUR, GBP, JPY, the same strategy is available in that currency. Fixed income returns is lower than equities and you can imagine you putting your money in a currency for 20 years, then you decide to retire in another currency, where you spend in that currency, and you realize that the returns after exchange the currency is very muted.

It is very nice for an adviser if you have a implementation of a strategy that is coherent, and you understand and can cater easily for goal planning if the constrain is the currency that they will spend when they retire.

Okay, let us look at some of these details one by one. They all matter to me and should matter to you (even though a lot of Singaporeans will just zoom straight to the returns)

The Range of Fixed Income Securities Held is Short

The maximum maturity of each fixed income security that the funds will hold is 5 years and 3 years respectively. This means the maturity of each bond bought will not exceed that.

The Range of Average Maturity (Range of Ave Mat) tells us about the range of maturity of the entire portfolio. What is the difference? The former is each bond and the latter is the portfolio.

Why is there a range?

In the Dimensional Strategy portion, I mentioned that the strategy is an active one. If the yield curve is steep, the money to be made is at the longer maturity part of the yield curve. This means we hold fixed income of longer maturity as opposed to shorter maturity in human-speak.

If the yield curve is flat or inverted, like the last two years, the better money is made at the shorter maturity. If the 0.5 year is earning 5% annualized and the 7 year is earning 5% annualized, which one is more attractive.

So the average maturity of the portfolio will shift but this is telling us the constrains put on the portfolio regardless of the market conditions.

Why is this important for you? The maturity is related somewhat to the duration. Duration measures the sensitivity of the portfolio to interest rate movement.

Knowing this allows you to invest with eyes wide open how your money will do when there is an interest rate surge up or down.

At the very least you can compare them against some individual bonds that you are trying to relate to.

A portfolio with short maturity does well in the last two years when the rates are relatively decent but what you will missed out will be when the yield curve is normal.

One of the premium to earn is the term premium, which is the longer the maturity, the more riskier is the bond (you are sinking in money, and potentially missing out on some good returns in some other things for a longer time), the higher return you should be compensated with.

If yield curve is normally steep in a contango fashion, then a long term investor would earn more with longer maturity. But the downside is the longer the maturity, the max drawdown can be more crazy.

So how do you strike a balance?

Start with financial planning. If your goal’s time horizon is short, don’t go for a fixed income unit trust with a fxxking long average maturity!

I would tell most don’t go too crazy on the maturity because for most, they don’t have a define goal for their money! Unless you are speculating on interest rate and you are prepared for the losses, it doesn’t make sense to follow some influencer and go for something like a TLT.

Going on a duration of 6 years or 8 years maturity (duration and maturity are technically two different things), which is the Global Aggregate Bond Index is okay for these undefine goal money. You can take a look at this article discussing the max drawdown of such a bond portfolio:

How Deep and Long Can Drawdowns in an Aggregate Investment Grade Bond Portfolio Last?

Should I Take Less Risk in My Fixed Income Allocation by Moving Away from a Global Aggregate Bond ETF?

Both Dimensional Funds Only Hold Fixed Income of High Quality

I have listed the credit quality of the fixed income securities the funds are constrain to owning.

The Global Short-term investment grade fixed income is riskier than the Global short fixed income in that it can own both A-rated and BBB-rated securities. The Short Fixed is constrain to only AAA and AA.

Usually, what is termed as investment grade is BBB.

The mix of fixed income for both strategy is very high quality.

Each bond is rated in terms of quality. Those with shitty quality have a high chance of default and to entice you, the yield-to-maturity of the bond will have to be higher.

But wouldn’t they default? High chance but may not.

So what if I put all my $3 million in a high yield bond? Your coupon in 2010 would probably be $150k every semi-annually, if you don’t give back all your $3 million when the fixed income default.

I used to have this chart from Bank of America showing the last 12-months default rate of US fixed income securities by credit quality. This is limited to BB, B and CCC because this was part of my report about the default rates of high yield bond funds. Typically, index high yield bond funds is not made up of only CCC-rated bonds but a mixture of BB, B and CCC. the lowest quality only makes up a small proportion and as you can see, the default rate during COVID and GFC is pretty high.

But focus on the BB rated ones. It tells you as a cohort the default rate.

Now suppose you put your $3 million in a portfolio of only CCC-rated bonds. You look at the default rate. It is as if one in two of those bonds you held is going to default. The Singaporean investor probably have a problem sleeping.

But it is different if you held a portfolio of BB rated ones. Sure, you will lose some money. But you want to lose like 5%, then make back that 5% and earn more over the next few years or you want to outright lose $3 million?

The bonds the Dimensional is constrain to is even higher quality than this and as a cohort, it is kind of tested against these sort of situation.

Current Yield-to-Maturity

Okay, now let us add some metrics that will shift over time:

These metrics shift because

1. the general market changes.
2. the strategy and portfolio allocation changes.

The yield-to-maturity tells us if we hold a single bond today, what is the return that we can earn over the maturity period. If it shows 4% and the bond is 6 years to maturity, you can earn a compounded 4% over this 6 years in total coupons + capital appreciation/depreciation combined.

If it is in a portfolio, the yield-to-maturity changes over time because the basket of underlying securities changes.

The yield-to-maturity is also the “price” of the fixed income security. We measure this bond, or this basket against the next via the yield-to-maturity.

If the government or market interest rate go up to 6%, the basket of bonds fall in price so that the yield that a non-owner looks at the yield change from 4% to 6%.

The current yield to maturity of the USD funds is 4.59% and 4.76% and the SGD hedge one is 3.03% and 3.2% respectively.

Why is the Yield-to-Maturity of the USD Funds Higher than the SGD Funds?

My colleague Choon Siong introduce me to this interest rate parity theory.

The short version is that over time, it tends to be a zero-sum game. You would think it makes sense to buy the USD one because it yields more than the SGD one, but the currency long term balanced this off.

This theory does not apply to all currency pair but it kind of applies to SGD and USD.

You can buy the USD fund for the higher yield but don’t come to me with the question: “But Kyith then how do I address the depreciation of the USD versus SGD in the long term?”

You kind of answer your own question. Either you hedged, which is what the SGD hedged unit trust is trying to do, or net off the currency losses, you earn a lower return.

Why is the Yield-to-Maturity of the Short-Term Investment Grade Fixed Income Higher than the Short Fixed?

The Short-Term Investment Grade pushes the securities that it can own to A-rated and BBB-rated. They are riskier and therefore have a higher compensation.

The more you push out the risk curve, the average yield to maturity of the portfolio is higher.

You can see how some of these play out later in the actual returns.

Both Funds Currently Have Extremely Short Duration and Maturity

The Ave Mat Yrs stands for the average maturity of the portfolio which is measured in years. The Ave Dur Yrs stands for average duration of the portfolio.

Duration is different from maturity which is why they are often confused. Duration measures the sensitivity of the portfolio to interest rate fluctuations.

The Dimensional Short Fixed income has a maturity and duration of 0.10 years and the Short-Term Investment Grade Fixed Income has a maturity and duration of 0.50 years.

Why so short?

If you look at the shape of most yield curve around the developed markets in the past 2 years, how do they look? Quite inverted and flat right?

Ask yourself if you are in more long maturity fixed income or short term cash accounts? Most likely is short term right?

The systematic strategy based around the yield curve does roughly the same thing that you have in mind. If yields in long maturity don’t make sense because there isn’t much premium on risk, I don’t buy such long maturity bonds.

So if now most of the yield curve is re-steepening, how would you be positioning?

Most likely longer maturity right? That is probably what the strategy will be shifting now.

If you agree with this philosophy, then this systematic-active strategy fund helps you express this.

Tight Credit Spread Likely Means Less Credit Risk Taking for the Strategy

Aside from Term risk, the other long term risk premium that the strategy tries to harvest is the credit premium.

You may have seen a chart like this around:

A chart like this show the yield spread between high yield bonds in this instance minus government bond yield. Each point on the chart shows that spread between a risky bond and a very, very low risk bond. The chart shows the spread over time. This is a high yield one, which is not at all indicative of these two Dimensional strategy.

But you can see that the spread changes over time. The spread is usually very high during market uncertainty. Since high yield bonds has high chance of default, the yield of high yield bonds is highest when they are pricing in a very high chance of default, relative to government bonds.

If we are sensible value investors and want to have a compensated return, we should buy the risky fixed income in a diversified manner when the yield spread is extremely high and not when the spread is extremely tight.

This consideration is build into Dimensional’s systematic-active strategy as well.

Currently, credit spread is very tight, this likely means that the preference here is less credit risk taking with a preference for more government securities than corporates.

If you add this and the maturity picture together, the strategy likely shifts to those areas where the yield curve is steeper, selling very short maturity to longer maturity, government securities.

Diversified Across 100 of Fixed Income Securities.

If we want to sink in a large amount of our hard earned money or money important to us, we don’t want our money blown a hole because a single sector or a single business decision that we think is okay went wrong.

I said we think is okay because if this is money that is precious to you, and you don’t think it is okay, why do you put in so much of your money in the first place?

The two funds is diversified with 289 and 480 securities respectively.

While I show the probability of default is extremely low, Murphy’s law means that you don’t want to sink your money into a few high quality issue and they still blow up in your face.

Diversifying is moving the probability of default rate closer to 0% based on Central Limit Theorem.

The Back-Tested Results of this Strategy

Dimensional crafted some of these custom indexes. These indexes are meant to show us what happens if we go back in history and run the strategies over history.

The Global Short Term Government Variable Maturity Index is one of these indexes to give advisers an idea how the returns are like for the Dimensional Global Short Fixed Fund. We don’t have an equivalent for the Short-Term Investment Grade but I think the result of the Global Short Term Government Variable Maturity Index is representative for us to have a sensing of how the performance is.

The data exist from 1989 to Nov 2024 which is almost 36 years.

It went through a period of relatively high interest rate going down to extremely low interest rate in the 2010s to where we are now.

The A. Return stands for annualized return and C. Return stands for cumulative return or in your dictionary total return.

The USD one is 4.95% and SGD one is 4.12%. These return is before TER (the TER of both funds is 0.25% p.a.). You can see that even with the historical the SGD return is lower. The cumulative return doesn’t mean much because its a return over 36 years. If you do this over 2 years, it is not going to be 400%.

I listed out the best and worst 1 year return more to show what is the worst 1 year return over this 36 years.

We will talk about that worse return later when we review the actual return.

If we evaluate that 4% long term SGD return together with what we are getting (passive effort on your end, diversified, high quality) that is a pretty good.

The Actual Performance of the Two Dimensional Funds from 2018 till end 2024

I have added the actual performance of the two funds, for both currency below:

We have full year data for the past 7 years.

The annualized return is 1.2-1.8% p.a. for the USD and 0.6 to 1.1% p.a. for the SGD. If you don’t want to accept currency risk, your returns will be lower. Eventually, you have to convert and spend in SGD.

The 8-year annualized return look nothing like the 36-year back tested return.

I think different people will look at the returns differently and I just want to share how I look at it.

The Actual Calendar Year Performance for Short-Term Bonds Should be Close to their Yield-to-Maturity

If you look at the returns for all four funds in the last two year, you can see it has been pretty good. This should be closer to the average yield to maturity of the portfolio.

The current yield-to-maturity is around 4.6% for the USD and 3.1% for the SGD so I do think the returns in 2025 should be around there.

But you can see there are two years with losses and yield to maturity is rarely negative. This means the performance is more yield-to-maturity + interest rate sensitivity. In those two years, the interest rate rise and the losses outweigh the organic return of the fixed income securities.

“Why do you recommend me to invest in a portfolio with 0.5% Yield?”

I can’t remember when it was.

Probably closer to 2020 when I first came in. I started hearing push back from prospects or clients since these two Dimensional funds are in the portfolio.

Singaporean bond investors are pretty current yield sensitive. They are trained by the individual bonds they are accustomed to. They prefer a certain acceptable yield.

So when they see that the average yield-to-maturity is 0.5%, they push back on it.

I can understand that and I think you would feel the same way.

If you look at the return in 2020, you can see they are more than 0.5%. What is difficult to comprehend is that actual returns work in a weird manner. If you buy an individual bond that yields 3%, you might be making an unrealized loss at some point because a similar individual bond currently yields 4% and if you sell it today, you would make a loss. But you don’t account for it because you will hold the bond to maturity. Holding it till maturity potentially will lose more if for the next 3-4 years the average yield stays at 4-5%. You could have made more.

Fast forward and at some point, the yield-to-maturity for these portfolio is 4%. Would 4% be more acceptable in your eyes?

Another potential question that I would like you to touch your heart and ask: Do you think that interest rate would stay low, like the last few years (from the perspective of 2019)? Could you see interest rates at 4.5%?

I think your answer would be no and yes but then you are already tainted as currently you see the future of what happen after 2019. If interest rate were to stay low for a few more years, what would you do with your money if you want them to be safe enough? You would either fight for fixed deposit which are at low rates or go for more risky stuff and hope they are safe enough.

When we recommend having both Dimensional funds as part of a portfolio, we are address a key characteristic that the portfolio needs (that you need) that the funds solve: They are much, much, much lower in volatility than equities and reduce the volatility of the portfolio when it is most needed.

That was true in 2019 and that is still true today in 2024.

Majority of the long term returns will come from the equities. But more so, if the portfolio is fixed income heavy, the portfolio has characteristics that our profile of investors need:

1. Passive on their end.
2. If there are credit and term premium to be earn at opportune time, someone help them systematically take advantage of it without them having to think about it.
3. If there are risks to each individual bonds, someone get them out of it.

These are the characteristics these Dimensional fund provides.

And the past two years return of 5% (USD) and 3% (SGD) respectively indicates that our investors benefit from it without them having to think or do portfolio management themselves.

This passiveness is something that many investors cannot see because non of the fixed income fund managers talked about it to the investors. Without clarity there, the investor think that they cannot rely on the fund manager and have to do it themselves.

The Two Loss Return Years

I am gonna put the table here again just so you don’t have to scroll up and see again.

I said that this is one of the safest fixed income funds out there but how come there can be losses? If you want a strategy that is going to earn a higher return in the long run, but still safe enough, you got to take on some risks.

The risk for this portfolio is unrealized losses when interest rates move dramatically against the existing holdings.

In 2021 and 2022, all the funds suffered losses.

Why did some cash management portfolios won’t have losses? If you invest in fixed deposits mainly, like MoneyOwl’s WiseSaver, which is 100% in Fullerton Cash Fund, you won’t suffer losses unless fixed deposit defaults. But the main reason is that fixed income doesn’t get mark-to-market.

Mark-to-market means revaluing what you own at each interval.

Most unit trust have to mark-to-market.

There are some unit trust that does not market to market. For example, the LionGlobal Enhanced Liquidity is a unit trust that invest in fixed income maturing in the short term, does not mark-to-market. So the NAV of the fund does not go negative. But what happens when a bond defaults? Then it will go negative! But if it is just one bond defaulting, the losses may be diluted by the returns of of the rest of the bonds so we might not see the losses.

I want to show you the yield on 1-year US Treasury somewhere in the second half of 2021 till today:

You can see on Oct 2021, the yield on 1-year bonds is 0.09%. By the end of 2022, the rate went up to 4.6%.

Remember that we say duration measures the sensitivity of losses and gain of a bond with a change in interest rate. You can count how many % change this is, which is almost 4.5%. The average duration then would be 1-2 years so a 4.5% rise in interest rate will cause the price of the bonds to fall by 4.5% to 9% roughly.

Which is the losses that we are seeing in 2021 and 2022 combined.

The worst return in the back-test Global Short Term Government Variable Maturity Index shows -7.86% which is pretty close to the number we see in actual return.

I always say that we just went through what is like a Great Depression for bonds. The equivalent is like when equities go from PE of 21 to 4-5 times PE. What do you think will be the equivalent of the stock price?

The most equivalent is either the Great Depression but I think the 1973-1974 feels closer where the PE went down a lot.

If you contextualize this loss:

1. This is the worst period in bonds in the past 75 if not 100 years.
2. And in the worst period the loss is less than 8% of the portfolio.
3. And you recovered in 3 years.

You might actually realize we just battle-test the funds for one of the critical things it should address.

There seem to be a lot of negativity in the returns but I think this is good.

Everyone seem to have a few “but what if XXX happens?” kind of questions regarding something they are very interested to invest in. If these questions are left hanging, you might invest hoping they don’t happen during your investment experience, or you might not invest at all.

I take this as: If we say that this strategy works the way we say, then it should do that when the actual situation happen. Having one of the worst condition for fixed income allows us to see that and you can make your assessment and decide whether you feel safe enough with eye wide open.

What Limit the Losses During 2022 to this Magnitude?

There wasn’t a credit event like a recession or a depression, which is what the high credit quality of the portfolios is suppose to prevent.

What kept the magnitude of losses low was the short duration of the portfolio. While you earn less when times are good, it is times like this that you really see why you should think more about the average maturity of your portfolio.

I want to illustrate how the duration impacts the losses and the subsequent recovery.

The chart below shows the price movement of 4 fixed income ETFs:

These are:

• iShares $ Treasury Bond 1-3yr UCITS ETF (IBTA) in light purple – Effective Duration: 1.8 years.
• iShares $ Treasury Bond 3-7yr UCITS ETF (CBU7) in pink – Effective Duration: 4.3 years.
• iShares US Aggregate Bond UCITS ETF (IUAA) in light green – Effective Duration: 5.8 years.
• iShares $ Treasury Bond 20+yr UCITS ETF (DTLA) in orange – Effective Duration: 15.9 years.

DTLA is probably the equivalent to TLT.

All these fixed income ETF is denominated in USD, accumulating, which means their returns will factor in all the returns. There is no dividend distribution. The price shows the actual return.

If we track the return today they will be:

• iShares $ Treasury Bond 1-3yr UCITS ETF (IBTA) in light purple – 4.04%
• iShares $ Treasury Bond 3-7yr UCITS ETF (CBU7) in pink – -3.77%
• iShares US Aggregate Bond UCITS ETF (IUAA) in light green – -6.48%
• iShares $ Treasury Bond 20+yr UCITS ETF (DTLA) in orange – -29.37%

Some like the IBTA have the closest duration to the Dimensional Short Fixed and Short investment Grade fund and the returns show that it has recovered.

The rest have yet to recover but CBU7 and IUAA have narrowed the losses. The duration give an indication how long it will take to recover. So CBU7 might recover after 2025 and IUAA the year after.

Fixed income will recover (unless heavy default) because each fixed income will have to return to the principal value when it nears maturity and there are coupon payment. It is a matter of when.

Something like the IUAA is less suitable at duration of 5.8 years if you need a sum of money in 3 years. And this experience shows that after 3 years, you are still down 6.5% roughly.

This should drive home the point that you need to know the time horizon of your goal and choose what you allocate to your goal wisely.

I was able to add the following data to the mix. I tabulated the calendar year return of the USD funds against some US Treasury bond index of various maturity profile as well as the Global Aggregate Bond Index:

What you will notice is:

1. When interest rate is falling with low fixed income volatility, the longer the maturity the return is better.
2. That all flipped when interest rate is rising. The longer the maturity profile, the worse they do.
3. You might notice why the 3-7, 7-10, 20+ years one did so badly in 2024. That is because interest rate at the long end of the curve is rising, while the rates at the short end was more stable.

Despite all this, even if you go 7 years out, I would think going -10% when interest rate went from 0.09% to 4.5% is still pretty low volatility compare to when equity PE go from 21 to 6 times. An equivalent of equity will be down like 60-70% in that kind of scenario.

Let us recognize the worse fixed income volatility is much, much less volatile than the worse equity volatility. Most importantly, when equity has big drawdown, any of these fixed income above will do very well and that is the purpose we have them in the portfolio.

The Returns Will Come Up as Fixed Income Volatility Stabilize

The question “When will fixed income recover?” will come up from time to time and from the last table, you can see fixed income are recovering across the board.

I think the returns will look pretty good after a couple of years for the short term maturity bonds like these two Dimensional funds, if the rates go down but not as low as in the past decade.

If you hold longer maturity fixed income in the portfolio, the higher coupons will aid the recovery. Imagine if the drawdown is 6% and the current average coupon the fund receives is 2.5%. That will be two more years in theory for global aggregate bond.

We can see recovery clearer for fixed income than equities. This is a critical difference in characteristics.

What These Dimensional Strategy is Not For?

The main appeal of these two Dimensional fund is if you have a sum of money that you don’t want to keep watch over, want it to be safe enough, and earn a term premium of 0-5 years, then this kind of stuff is for you.

But if you are someone who is constantly worried or intrigued by macro-economic events, and want to shift your money from cash, to equities, or fixed income based on your read of these events, and its impact on interest rates and bonds, these funds might not be for you.

I think most Singaporeans would not be in this category that I have just described.

They are more intrigued and worried because they thought they needed to. If they don’t actively manage their money, then they would lose all their money or something bad will happen to their money.

Well, I think I tried my best to explain how some of these risks impacts the funds negatively and in the past 3 years, we have seen all these played out and the funds do what they were supposed to do.

If investors still worry or think it is best to manage it themselves then they can go ahead and find their own solution.

But don’t come and ask me for safe income solution because I have probably give you the sweet spot of something that you are looking for.

Would Other Actively Managed Short Term Fixed Income Funds Behave like the Dimensional Funds?

I cannot say for certain.

This is because I don’t have an idea what other actively-managed fund managers are doing.

The critical thing that make these Dimensional funds safe is not the manager but the mandate of 0-5 years maturity and limiting the credit quality to a certain degree.

This made sure the funds perform well when equities don’t do well and that when interest rates go up, the unrealized losses are low.

If you look at my last table, you can see you can have the same effect if your fund own the same profile of fixed income securities.

The short answer is look at what the unit trust owns and what is the investment mandate.

Conclusion

For those wondering how you can invest in these Dimensional funds, some of the fee-based advisers out there should allow you to invest in them, although you wonder what other stuff they will recommend you.

The clients of Providend will have this in their portfolios for those financial goals that are pretty short term.

Endowus do carry them and if you have not open an Endowus account, here is my referral code.

I am sure some of you have some stuff you do not understand about the post or have a certain perspective about the funds, any aspect discussed, you can leave a comment below.

---

If you want to trade these stocks I mentioned, you can open an account with Interactive Brokers. Interactive Brokers is the leading low-cost and efficient broker I use and trust to invest & trade my holdings in Singapore, the United States, London Stock Exchange and Hong Kong Stock Exchange. They allow you to trade stocks, ETFs, options, futures, forex, bonds and funds worldwide from a single integrated account.

You can read more about my thoughts about Interactive Brokers in this Interactive Brokers Deep Dive Series, starting with how to create & fund your Interactive Brokers account easily.