None of Korea's Biggest Bond Funds Beat Sovereign Debt in 2015

  • Company debt ratings worsened most since 1998 as growth slowed
  • Investors wary of long-term debt due to volatility: KB Asset

South Korea’s biggest bond funds all delivered worse returns than sovereign notes last year as debt ratings deteriorated the most since 1998 and monetary easing disappointed investors.

The best performer among 24 fixed-income funds managing more than 300 billion won ($249 million) was run by Samsung Asset Management Co. and gained 5.7 percent. The biggest, overseen by Hanwha Asset Management Co., earned 2.1 percent. Won sovereign debt made 6.25 percent, a Bloomberg index shows. The extra yield investors demand to hold corporate bonds over government notes climbed to the highest since 2012.

"Yields often went in opposite directions to what managers expected in 2015," said Ryu Young Jae, the Seoul-based head of fixed income at Samsung Asset, which oversees 202 trillion won. “Funds that only invested in government bonds have seen relatively better results, while those who put more money in corporate bonds had low returns.”

While South Korea’s two interest-rate cuts and a worsening economy are supporting demand for debt, tightening monetary policy in the U.S. risks pushing yields higher globally and triggering an exodus of capital from emerging markets. Korea Investors Service said in November that rating downgrades will likely continue in the first half of 2016 as the global economic slowdown hurts Korean manufacturers.

Yield Forecasts

Three-year sovereign yields sank to a record low at the end of September before rebounding in the runup to the Federal Reserve’s December rate increase. Hanwha Asset predicts the three-year yield will rise to 1.85 percent by the end of June, from 1.64 percent. It will advance to 1.9 percent by year-end, according to a Bloomberg survey of analysts. Both Hanwha and Samsung foresee bigger swings in yields in 2016 as the sluggish growth outlook hurts company debt and drives demand for government notes.

Rating downgrades for Korean companies exceeded upgrades last year by the most since 1998. Some 59 local borrowers’ had their credit assessments cut by Korea Investors Service, a local affiliate of Moody’s Investors Service, while 10 were raised. The spread for three-year domestic won-denominated corporate notes rated AA-, the benchmark according to the Korea Financial Investment Association, over government notes widened 24 basis points last year to 58 basis points, the highest since 2012.

“If you had invested in corporate bonds, profits would have been slashed,” said Kim Hong Joong, team head of fixed income at Hanwha Asset, which oversees 76 trillion won.

The economy is forecast to expand 2.9 percent in 2016, compared with 2.6 percent last year, according to Bloomberg surveys. The Bank of Korea, which reduced its benchmark rate by a percentage point to 2.5 percent from August 2014 to June 2015, will stay on hold at a meeting on Thursday, according to 15 of 16 economists surveyed by Bloomberg. A separate survey shows 17 of 25 analysts see no easing this half.

Growth Risks

Exports, which account for about half of gross domestic product, dropped in every month of 2015. Downside risks to growth increased due to the slump in shipments and external uncertainties, according to the minutes of the BOK’s December meeting.

The central bank will update its 2016 growth forecast of 3.2 percent on Thursday. The monetary authority is likely to reduce its projections, which will curb the rise in yields, according to KB Asset Management Co.

"Customers are afraid of putting their money in long-term debt due to concern about volatility," said Moon Dong Hoon, Seoul-based head of fixed income at KB Asset, whose government and agency securities trust returned 4.2 percent last year, the fourth-best performance among the 24 funds. "Going into 2016, we have to keep watch if the economic recovery will meet expectations just as the BOK is seen to have come to the end of its easing cycle."

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