AXA IM launches ESG-integrated euro denominated emerging market debt fund

AXA Investment Managers (AXA IM) announces the launch of the AXA WF Emerging Markets Euro Denominated Bonds fund, focussing on investing in emerging market bonds issued in euros while also adhering to AXA IM’s ESG standards.

The fund aims to provide a welcomed alternative for investors looking to increase their emerging market debt (EMD) exposure while removing the complication of US dollar hedging costs and providing an effective long-term solution should costs rise in future.

The fund is currently registered and available to professional and retail investors in the UK, France, Austria, Belgium, Denmark, Finland, Italy, the Netherlands, Norway, Spain and Sweden.

The fund invests in emerging market growth opportunities and avoids distressed debt names, while focussing on debt issued by emerging market countries where the local currency is either pegged to the euro or revenues are received in euros, thus encouraging the issue of euro denominated debt. It also only invests in securities rated B- or higher, with a focus on sovereigns and corporate issuers.

To increase overall diversification and the potential yield for investors, the fund does also benefit from a maximum 20% allocation to USD bonds given some countries do not issue in euros. As a result, no emerging market regions are excluded and the fund boasts a total exposure to around 40 countries.

As part of AXA IM’s commitment to integrate ESG across its open-ended fund range, this fund adheres to AXA IM’s ESG standards and will apply additional screening policies to minimise exposure to companies with low ESG scores. ESG research and key performance indicators form a key part of the investment decision-making process.

Given euro dominated bonds are stereotypically less liquid, the fund mitigates such risk by only investing in issues that are over €500m in size. It also has a bias towards sovereign bonds which are typically more liquid. The fund is managed with a short duration bias to minimise volatility and promote strong risk-adjusted returns.

Commenting on the launch, Mikhail Volodchenko, manager of the AXA WF Emerging Markets Euro Denominated Bonds fund, said: “While hedging costs have fallen, we believe they are likely to rise in the future, and this strategy removes the complication of this effect. There has clearly been a significant amount of volatility in capital markets this year as a result of the economic impact of coronavirus, and emerging markets have not been exempt from this. However, with unprecedented support from developed central banks and governments, we believe this has led to attractive opportunities for those sovereign and corporate issuers best placed to weather the storm and bridge the gap to the other side of the pandemic, and we believe this fund has the flexibility to take advantage of them.

“The euro emerging market asset class has exhibited substantial growth over the past 10 years, with many euro issuers debuting in the market and the asset class seeing an increase in breadth and diversification as a result. This is a trend we expect to continue in the coming years, thus presenting an opportune moment to add a Euro EM debt fund to our offering capitalising on this expansion.”

Sailesh Lad, Head of Active Emerging Markets Fixed Income at AXA Investment Managers, added: “The EM debt sector has long been dominated by USD denominated products which have not produced expected yields for investors as hedging costs continued to rise. However, the euro denominated universe is now big enough for us to launch such a product that provides a cleaner and more favourable alternative for investors looking to increase their EM debt exposure but are impacted by US dollar hedging costs. With attractive market developments, matched with our heritage of managing short duration portfolios, the fund is a strong addition to our emerging market fixed income offering.”