Global short duration bonds to combat rising rates
- 29 June 2021 (5 min read)
The AXA Global Short Duration Bond Fund may suit investors looking for better returns than cash by taking an intermediate step into riskier assets while reducing sensitivity to rising interest rates. With the global economy recovering rapidly from the impact of COVID-19, central banks are likely to tighten monetary policy in the coming years.
A portfolio of global short duration bonds is one way to adapt to rising interest rates. In addition to this core attraction, we believe the asset class also offers the following benefits:
The ability to mitigate the impact of market volatility as short duration bonds have historically displayed a lower level of volatility and drawdown compared to the wider maturity market.
A potential increase in portfolio liquidity due to regular cash-flow from maturing bonds and coupon income.
An intermediate step into riskier assets, with short duration bonds potentially offering a cash-plus return for a modest increase in risk.
The AXA Global Short Duration Bond Fund invests across the whole of the short duration fixed income spectrum, including sovereign (nominal and inflation-linked), investment grade, high yield and hard currency emerging market bonds. The fund invests in cash bonds with a maturity or expected call date below five years, maintaining an average investment grade rating at all times. It also has the ability to use interest rate and credit derivatives in order to efficiently manage the level of risk.
How do we invest?
Our short duration team share a common investment philosophy; we believe that compounding income through active management is critical to generating long-term returns within fixed income, alongside mitigating downside risk through diversification and fundamental credit analysis. The fund aims to generate an annualised return of EONIA +150 basis points over a rolling two-year period (before fees).
By directly investing in short-dated bonds, we can create a strategy with an attractive natural liquidity profile (with c.20% of bonds maturing per year), minimising performance leakage from transaction costs and potentially benefitting in times of a rising yield environment.
Crucially, the strategy’s resilience does not come at the cost of yield, given the breadth of our universe and ability to invest in the best short-dated opportunities across high yield and emerging markets, up to 60% of the fund.
While the onshore product is not classified under the EU’s Sustainable Finance Disclosure Regulations, its offshore equivalent is classified as Article 8. AXA IM has strict exclusion policies and ESG standards, with the offshore fund maintaining a higher overall ESG score than a proxy benchmark used for ESG monitoring purposes only.1
Why AXA IM?
We have been managing short duration strategies for more than two decades, and have built up extensive expertise in that time, from fundamental credit research to a dedicated bond trading desk. In total, we manage €15bn across eleven dedicated short duration strategies, spanning the full risk spectrum of fixed income.2
The AXA Global Short Duration Bond Fund features the best ideas from across the whole of our short duration desk. The fund is a high conviction flexible portfolio, representing the core strategies from our suite of short duration funds, with investors benefitting from our in-depth credit research and prudent risk management – ultimately with the objective of delivering superior risk-adjusted returns.
Cumulative performance
| 3M | 1Y | 3Y | SL | |
| AXA Global Short Duration Bond Fund Z GBP | 0.56% | 4.98% | 7.28% | 7.60% |
| ICE BofAML £ 3-month Deposit Bid Rate Average | -0.02% | -0.01% | 1.33% | 1.65% |
Annualised performance
| 2018 | 2019 | 2020 | |
| AXA Global Short Duration Bond Fund Z GBP | -1.07% | 4.50% | 2.97% |
| ICE BofAML £ 3-month Deposit Bid Rate Average | 0.56% | 0.71% | 0.26% |
Source: AXA IM, June 2021. Inception date of 17/05/2017 for AXA Global Short Duration Bond Fund Z GBP. Past performance is not a reliable indicator of future results.
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Counterparty Risk: failure by any counterparty to a transaction (e.g. derivatives) with the Fund to meet its obligations may adversely affect the value of the Fund. The Fund may receive assets from the counterparty to protect against any such adverse effect but there is a risk that the value of such assets at the time of the failure would be insufficient to cover the loss to the Fund.
Derivatives: derivatives can be more volatile than the underlying asset and may result in greater fluctuations to the Fund's value. In the case of derivatives not traded on an exchange they may be subject to additional counterparty and liquidity risk.
Geopolitical Risk: investments issued or traded on markets in different countries may involve the application of different standards and rules (including local tax policies and restrictions on investments and movement of currency), which may be subject to change. The Fund's value may therefore be impacted by those standards/rules (and any changes to them) as well as the political and economic circumstances of the country/region in which the Fund is invested.
Hedging Risk: Currency Hedging within the Fund seeks to reduce the impact of exchange rate movements of the investments' currencies relative to the fund's base currency. Over a period of time the hedging strategy itself may create a positive or negative impact to the value of the Fund, mainly due to differences in short-term interest rates between the currencies.
Interest Rate Risk: fluctuations in interest rates will change the value of bonds, impacting the value of the Fund. Generally, when interest rates rise, the value of the bonds fall and vice versa. The valuation of bonds will also change according to market perceptions of future movements in interest rates.
Emerging Market Risks: emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. As a result, investments in such countries may cause greater fluctuations in the Fund's value than investments in more developed countries.
Liquidity Risk: some investments may trade infrequently and in small volumes. As a result the Fund manager may not be able to sell at a preferred time or volume or at a price close to the last quoted valuation. The Fund manager may be forced to sell a number of such investments as a result of a large redemption of shares in the Fund. Depending on market conditions, this could lead to a significant drop in the Fund's value and in extreme circumstances lead the Fund to be unable to meet its redemptions.
Credit Risk: the risk that an issuer of bonds will default on its obligations to pay income or repay capital, resulting in a decrease in Fund value. The value of a bond (and, subsequently, the Fund) is also affected by changes in market perceptions of the risk of future default. The risk of default for high yield bonds may be greater.
Further explanation of the risks associated with an investment in this Fund can be found in the prospectus.
What are short duration bonds?
Short duration bonds can offer a smart alternative to government bonds or cash in a bank
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Risk Warning
The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.