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Global Strategic Bonds: Reasons for optimism in 2021

  • 18 January 2021 (5 min read)

Strategy update

AXA WF Global Strategic Bonds increased its momentum in 2020 with a healthy total return of +6.70%.This backed-a total return of +9.55% in 2019 – the strongest calendar year return since the fund’s launch. Furthermore, since its inception, the fund has returned +49.72% (+4.78% annualised) with a volatility of just 3.29%.*

We believe that, despite the imminent challenges faced by the global economy from the continued effects of lockdowns and weak fundamentals, there are certainly factors that allow us to look at prospects in the bond market with a renewed but cautious sense of optimism heading into 2021. 

Reasons for optimism

1. Central banks are here to stay

In many ways, 2020 was defined by the extraordinary innovation and commitment of central banks to rolling out vast monetary stimulus packages, which curbed the market turmoil witnessed in mid to late March and initiated a powerful and broad-based recovery that has given companies the confidence to issue record-breaking amounts of debt and investors the confidence to purchase it! Given the scale of the damage to the global economy in 2020, central banks will need to keep interest rates at their current historic low levels in order to continue these programmes into 2021 and beyond if the recovery is to be meaningful and long-lasting, not least because lockdowns persist in many regions and the pathway to mass vaccination remains unclear. This should see government bond yields continue to trade in a tight range, giving us confidence that high quality duration remains an important bedrock of a diversified portfolio.

2. The taming of the flu

That said, the fact that we do now have the positive news of several vaccines (Pfizer/Biontech, Moderna and AstraZeneca), which have already been approved in some countries, is cause for great optimism. In the UK, the second person to receive the vaccine happened to be called William Shakespeare – perhaps a subtle reminder that there are many twists and turns yet to be had in this particular plot as attentions turn to vaccine acquisition and rollout. Nevertheless, we remain optimistic that 2021 should herald the gradual re-opening of many sectors which have suffered greatly as a result of lockdowns. This should benefit credit markets and risk assets generally, as economic activity picks up and people begin to travel once more.

3. A market for the active stock pickers

Such was the nature of the economic downturn in March 2020 that much of credit, high yield and emerging markets quickly became very cheap, meaning that investors were able to benefit from a broad-based market rally following central bank stimulus. Arguably, in this sense, owning market beta in the right areas was enough to generate decent returns since April 2020. However, we think next year could bring about a greater differentiation between the “winners” and the “losers” as the recovery moves into its next stage. Indeed, there are still selective credit opportunities that look “cheap” and should continue to recover. Other opportunities look cheap and will stay cheap, or, in some cases, default. Meanwhile, other parts of the market now look very expensive and the ability for them to rally further seems unlikely. Portfolio managers therefore need to be more adept than ever at finding the right opportunities. Our active and fundamentally-driven approach to credit selection is well suited to this environment, allowing us to pick the names we feel are attractively valued and stand least chance of default. Here, we very much benefit from the ideas of local experts based across different markets. Heading into 2021, we feel particularly constructive on US and Asian high yield, where we have been gradually adding – and will continue to add – to select opportunities.

4. Emphasis on ESG integration to take on new dimensions

We believe that 2021 will bring about a marked change in the way investors look at ESG integration within fixed income portfolios. No longer will it be just about screening out certain sectors and having a scoring methodology, but more focus will come onto the positive impact that ESG optimisation can have both for financial returns and broader society, particularly as we transition to a post-coronavirus environment. We are well placed to go further in our adoption of ESG factors – from our fundamental research through to our expertise in green bonds – a universe that we think will expand exponentially in the coming years. We will also seek to embed an ESG “KPI” into our day-to-day management of the fund, meaning that the balance between financial and non-financial criteria in the investment decision-making process should be more equal than ever.

5. Constant approach for a changing world

Our strategy now enters its ninth full calendar year since inception. Over those years, our simple and transparent investment framework, which is founded on three distinct “risk buckets” (Defensive, Intermediate and Aggressive), has proven that structural diversification across different fixed income risk factors can generate attractive risk-adjusted returns over an economic cycle. Although our approach may have remained constant, the world around us has certainly changed a great deal, and indeed the post-coronavirus landscape will most certainly look very different again to the one we had become accustomed in heading into 2020. This is why we believe very strongly that the best way to navigate through a volatile and uncertain outlook is not to massively re-allocate from one day to the next, or take significant bets on one particular part of our universe in the hope that we strike gold. Rather, our focus is on maintaining a portfolio that is robust and diversified across different fixed income asset classes, whilst tactically using our broad flexibility and leeways to position for shorter-term market moves.

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Fund Risks

All investment involves risk and capital is not guaranteed. AXA WF Global Strategic Bonds is invested in financial markets and uses techniques and instruments which are subject to sudden and significant variation, which may result in substantial gains or losses.

Counterparty Risk: risk of bankruptcy, insolvency, or payment or delivery failure of any of the fund's counterparties, leading to a payment or delivery default.

Credit Risk: risk that issuers of debt securities held in the fund may default on their obligations or have their credit rating downgraded, resulting in a decrease in the Net Asset Value.

Operational Risk: risk that operational processes, including those related to the safekeeping of assets may fail, resulting in losses.

Liquidity Risk: risk of low liquidity level in certain market conditions that might lead the fund to face difficulties valuing, purchasing or selling all/part of its assets and resulting in potential impact on its net asset value.

Impact of any techniques such as derivatives: certain management strategies involve specific risks, such as liquidity risk, credit risk, counterparty risk, legal risk, valuation risk, operational risk and risks related to the underlying assets. The use of such strategies may also involve leverage, which may increase the effect of market movements on the fund and may result in significant risk of losses. Further explanation of the risks associated with an investment in this fund can be found in the prospectus

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