Warning: members of the public are being contacted by people claiming to work for AXA Investment Managers UK Limited.  Find out more information and what to do by clicking here.

AXA Global Strategic Bond Fund: Q&A

  • 13 February 2023 (5 min read)

Your questions about the AXA Global Strategic Bond Fund answered.

Why should investors consider strategic bond funds for their portfolio?

2023 starts with very attractive yields and improved entry points for credit spreads. We believe that fixed income is competitive with other asset classes once again: yield levels in certain markets now offer the potential to compete with long-term average equity returns, but with fixed income risk.

AXA Global Strategic Bond Fund allows investors to outsource their fixed income allocation to a global team with core expertise in all major markets, and specialists in sectors such as high yield and emerging markets. We bring that together with a global approach managed by a core team in London in a very simple, transparent structure, that helps investors navigate what can be a complex asset class.

What is the main objective of the global strategic bond strategy?

It is a long-only global fixed income strategy, designed to combine the best of government bonds, high quality credit, high yield and emerging market debt in order to deliver attractive risk-adjusted returns.

What makes this fund unique?

It provides a core bond allocation with a very clear, distinct approach. It breaks down the global fixed income universe into three risk buckets:

  • Defensive – interest rate sensitive assets such as government bonds
  • Intermediate – primarily high quality credit, combining interest rate and credit spread sensitivity
  • Aggressive – lower-quality credit and equity-like default risk

We think this adds transparency to our approach and provides clarity for clients in a sometimes complicated and opaque sector.

Within that approach, where do you look to add the most value?

What you get with the AXA Global Strategic Bond Fund is your entire global fixed income allocation managed by us within a single portfolio.

This is supported by the scale and depth of AXA IM’s fixed income platform and resources, comprising dedicated teams around the world managing individual, local fixed income assets. We bring that all together within a single strategy, helping clients navigate a lot of the uncertainty over the investment cycle without needing to worry too much about how they asset allocate or manage things like duration or curve positioning.

How can investors judge whether or not you’re hitting your objectives?

The first thing we always say is that clients are the best judge of whether we’re doing a good job or not, and each will have their own opinion on that. But we look at it in a few different ways.

First of all, are we delivering attractive risk-adjusted returns over an economic cycle? Clearly you can never know how long an economic cycle is until after the event, but we tend to think of it as being between three to five years, and consider risk-adjusted performance over that time frame.

Second, we look at how we are performing compared to individual asset class sleeves. We think it is helpful for clients to understand what they might get if they were to allocate to an index in government bonds, credit or high yield emerging markets, and compare that to the performance that we can deliver through a diversified fixed income strategy.

And finally, it is a competitive space and so we monitor our performance against the broader peer group. While we sometimes look at individual competitor funds, we try to keep the bigger market picture in mind and not be unduly influenced by short-term market trends. We’ve been doing this for 10 years now and we are not going to change the way we do it based on what others are doing, but it’s a helpful reference point.

How do you manage duration on the portfolio?

Duration management is arguably the biggest driver of any bond investment, and we allow ourselves a wide leeway of anything between zero and eight years for overall duration exposure.

We manage duration through both asset allocation and government bond futures. Allocating away from government bonds into credit or high yield is likely to bring down your duration exposure; combined with this approach, government bond futures are very liquid and simple instruments to increase or decrease duration sensitivity as required.

When market dynamics change we are quite comfortable making significant duration calls. Last year, for example, was a complicated and reasonably painful year, and duration ranged between zero and six years at different times.

How active are you in moving allocation between your three risk buckets?

Shifting allocation between the buckets is a very important part of our strategy. At an asset allocation level, where we might be moving our duration up or down by one or two years at a time, if we’re allocating to high yield out of government bonds or credit, that could be a 3% or a 5% move at any one time. However, we operate within certain constraints to ensure a consistent approach. There are limits as to what we can and can’t own to help maintain an appropriately diversified portfolio – for example, we cannot hold more than 60% in high yield and emerging markets.

Another important consideration is that there can be a lot going on within each bucket. For example, within high yield, even if we haven’t changed allocation to the risk buckets, we could go more defensive by owning a lot more short duration high yield assets, or go more aggressive and own more longer-dated or even lower-rated issues.

The final asset mix is largely a result of three broad factors. Firstly, the structural diversification that’s afforded to us by the global universe. Secondly, the three risk buckets and the ability to allocate between and within them. And finally, the impact of security selection and the individual names that are going into each bucket.

Would you always have a certain proportion of the portfolio in government bonds, regardless of what else is going on?

Absolutely. Maintaining exposure to government bonds – whether they be long-dated and relatively risky or very short-dated, lower yielding and therefore less risky – is very important.

When we talk about attractive risk-adjusted returns, that means a decent return with a relatively low volatility. Government bonds traditionally have a very low, if not negative, correlation to equity-like assets such as high yield or emerging markets and maintaining diversification across those asset classes helps us reduce volatililty.

What are your thoughts on the active/passive debate when it comes to fixed income?

Our strategy is very much active and dynamic. A passive approach can be suitable for certain investors who want certain outcomes, but it is worth being cautious over how the indices that passive investing follow are structured.

A lot of the time these indices are rules-based, and can therefore end up being overweight to the most indebted issuers within the index, which skews their composition and creates certain biases. A global aggregate index is going to have a higher proportion of government bonds than credit, so investors will end up with more duration than they might get in an active unconstrained global strategic strategy, where we can move duration around flexibly and dynamically. These are not necessarily bad things, but it is important to understand what you’re getting out of the index.

Additionally, it is worth considering environmental, social and governance (ESG) matters that are important to our investor base and clients generally. With an active approach, we are able to look at different issuers and filter them by ESG risks and opportunities, and really build that into the portfolio. With a passive investment process, you are not necessarily getting the same approach. And when it comes to engaging with the issuers you invest in, and influencing them to adopt better carbon transition metrics, net zero targets or whatever it might be, you have more leverage as an active investor.

What resources can you bring to bear on the fund? How do you go about making investment decisions?

AXA IM is a big global investment management house, with a huge capability in global fixed income. We have fixed income investment teams based in London, Paris, New York and Hong Kong. The idea behind this strategy is to bring those global ideas into the one portfolio, and that requires a big team effort.

The global central team of four is based in London. They have overall responsibility for constructing the portfolio and are accountable for performance, and do the investment grade and duration management. Then they carve the portfolio out to local teams with specific expertise, for example in high yield or emerging markets. Those teams are busy picking the individual securities; they use their specialist knowledge to put the high yield or the emerging market names into the portfolio.

What do you see as the main threats and opportunities for the year ahead in 2023?

With attractive yields and attractive spreads, the all-in return potential for fixed income is very high. We expect some volatility, but the underlying carry or the underlying yield on a fixed income portfolio is now more attractive than it has been for many years. But as ever with investing, there are threats, and the risk that maybe 2023 turns out a little bit like 2022.

We have come off of a very difficult 2022. Fixed income returns have been very weak, minus double digits in some places. We have seen very high inflation of the sort we have not had for a number of decades. Central banks have been very behind the curve and are now aggressively tightening interest rates or tightening financial conditions to combat inflation. That is not typically a good environment for fixed income.

However, we are now looking at an asset class that is providing a yield that we have not seen for many decades. Government bond yields are 3%, 4% and sometimes close to 5%. If you add on a credit spread of a couple of hundred basis points, or get into even more attractive high yield and emerging market debt, you can get to yields in the high single digits, if not double digits. If those yields turn into returns, then you are looking at equity-like long-term returns for fixed income risk levels. That is pretty attractive.

The threats are a continuation of what we’ve seen in 2022. We still have high inflation; many people are starting to speculate that central banks have done the vast majority of the job in raising interest rates, but who knows? If inflation stays very stubborn, or even goes higher, then interest rates are going to go up again.

After the repricing of fixed income in 2022, it does feel like we’re in a very different regime and environment. Does that change the way that you think about fixed income as an asset class?

What is definitely different is that yields are much higher than we’ve seen for quite a while. We’re in an environment where we don’t have the support of central banks; for the previous 10 years or so we had quantitative easing, with central banks being a huge buyer of government bonds and credit. That forced yields down, and so we had to work hard to deliver a decent return.

Now we face the potential for sustained and possibly stubborn inflation. That takes a different mindset. We are less reliant on central banks, but at the same time we are being compensated for that. Yields are attractive, which makes the carry on the portfolio higher than it has been for some time. We now have to think about bonds in a slightly different way, on the basis that the running yield is going to carry a lot of return. You still have the potential for volatility, and the dispersion on offer – the fact that high yield now goes into double digits and government bonds are high to mid-single digits – means there is much more opportunity.

Fixed Income

Unconstrained Fixed Income

This provides the potential flexibility to capitalise on opportunities across the fixed income spectrum as and when they arise.

Find out more

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

Related Articles

Fixed Income

Why consider inflation-linked bonds in a stabilising rates environment

  • by Elida Rhenals
  • 21 November 2023 (5 min read)
Fixed Income

India - a bright spot in emerging markets

  • by Shiv Chopra
  • 14 November 2023 (5 min read)
Fixed Income

What are the risks and opportunities for fixed income in 2024?

  • by Boutaina Deixonne
  • 31 October 2023 (5 min read)

    Disclaimer

    Not for Retail distribution: This marketing communication is intended exclusively for Professional, Institutional or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

    This marketing communication does not constitute on the part of AXA Investment Managers a solicitation or investment, legal or tax advice. This material does not contain sufficient information to support an investment decision.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    AXA Global Strategic Bond Fund is a sub-fund of AXA IM Fixed Income Investment Strategies which is a Luxembourg UCITS IV Fund (“fonds commun de placement”) approved by the CSSF and managed by AXA Funds Management, a société anonyme organized under the laws of Luxembourg with the Luxembourg Register Number B 32 223RC, and whose registered office is located at 49, Avenue J.F. Kennedy L-1885 Luxembourg.

    Additional risks:

    The capital of the Sub-Fund is not guaranteed. The Sub-Fund is invested in financial markets and uses techniques and instruments which are subject to some levels of variation, which may result in gains or losses.

    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.

    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.

    Securitised assets or CDO assets risk: Securitised assets or CDO assets (CLO, ABS, RMBS, CMBS, CDO, etc.) are subject to credit, liquidity, market value, interest rate and certain other risks. Such financial instruments require complex legal and financial structuring and any related investment risk is heavily correlated with the quality of underlying assets which may be of various types (leveraged loans, bank loans, bank debt, debt securities, etc.), economic sectors and geographical zones.

    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.

    Risks linked to investment in sovereign debt: Where bonds are issued by countries and governments (sovereign debt), the governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the capital and/or interest when due in accordance with the terms of such debt. In the event of a default of the sovereign issuer, a Fund may suffer significant loss.

    High yield bonds risk: These bonds are issued by companies or governments with lower credit ratings and as such are at greater risk of default or rating downgrades than investment grade bonds.

    Contingent convertible bonds (“CoCos”): these financial instruments become loss absorbing upon certain triggering events, which could cause the permanent write-down to zero of principal investment and/or accrued interest, or a conversion to equity that may coincide with the share price of the underlying equity being low. It is possible in certain circumstances for interest payments on certain CoCos to be cancelled in full or in part by the issuer, without prior notice to bondholders. Further explanation of the risks associated with an investment in this Fund can be found in the prospectus.

    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. 

    Are you an IFA or other Professional Investor ?

    Are you a financial advisor, institutional, or other professional investor?

    This section is for professional investors only. You need to confirm that you have the required investment knowledge and experience to view this content. This includes understanding the risks associated with investment products, and any other required qualifications according to the rules of your jurisdiction.