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How unconstrained fixed income can help your investment journey

  • 01 June 2021 (5 min read)

Fixed income offers a variety of sub-asset classes with a broad spectrum of potential risk and return outcomes. An active, unconstrained approach has the potential to use this diversification to smooth your overall journey through the economic cycle, as markets move and change.

This does not need to be an overly complicated task though. We think building an investment portfolio can be compared to designing a car; it is important to have the right basic foundations for the best chance of keeping your car running safely and smoothly, whatever the weather.

So how you do build an all-weather vehicle to navigate changing conditions? We believe there are two important preconditions:

  1. Check what’s under the bonnet. Portfolio transparency and a simple investment framework are more important than exotic looking features. Otherwise, you could end up being exposed to significant risks that you knew nothing about!
  2. Make sure you have enough fuel – or liquidity – to be prepared for whatever the journey brings. The AXA Global Strategic Bond Fund has a structural allocation to high-quality government bonds to provide liquidity when it’s needed most

A varied toolkit

If you want your car to perform optimally through the changing seasons, you need to be able to access the right tools for the right conditions – anti-freeze or snow tyres for winter, and air conditioning and coolant for summer. The same applies to a portfolio. In order to perform through an economic cycle, it is vital to have access to different tools and apply them actively to respond to a changing and unpredictable environment.

In running the AXA Global Strategic Bond Fund, we consider the global fixed income universe our available toolbox. We take a straightforward approach to breaking down this diverse and broad universe into three risk buckets:

  • Defensive: government and inflation-linked bonds, between 0-100% of the portfolio
  • Intermediate: periphery government and investment grade credit, between 0-60% of the portfolio
  • Aggressive: high yield and emerging market bonds, between 0-60% of the portfolio

Active, high conviction duration management is another important tool in flexibly responding to markets. Within the Global Strategic Bond Fund, we have a leeway of 0-8 years for duration.

Responding to every twist and turn of the journey

The right foundational features and a varied toolbox is a good place to start but deploying the right tools at the right time is just as important. Any investor will have to navigate twists and turns in the road on the journey to their investment goals. The journey will probably take a long-term investor through the different stages of the economic cycle.

While market conditions can vary, we believe there are four key phases of the economic cycle.

  1. Expansion:  we would look to be taking advantage of opportunities for higher returns in more ‘aggressive’ assets, taking on a higher proportion of credit risk at a time when it’s most likely to be rewarded.
  2. Slowdown: in these conditions we could be holding a mix of mostly ‘intermediate’ or ‘defensive’ assets, such as investment grade credit and government bonds, with a lower allocation to higher risk assets which would probably fall out of favour in the next phase.
  3. Recession: in a recessionary phase, we are likely to be using more ‘defensive’ assets like government bonds and cash to minimise risk. So, we would have more interest rate risk than credit risk during a period where interest rates would be unlikely to rise.
  4. Recovery: as we move into recovery, we would probably be looking for opportunities to selectively take on more credit risk: combining a balance of high-quality 'defensive' assets at one end of the spectrum and some higher yielding 'aggressive' assets at the other end, with limited exposure to 'intermediate' assets.

Why AXA IM for unconstrained fixed income?

We consider the AXA Global Strategic Bond Fund to be a global solution backed by local expertise. Nick Hayes, Portfolio Manager, has more than two decades’ experience as an investor, and is able to leverage the expertise of over 100 fixed income professionals.

By having the flexibility to invest across the fixed income spectrum via a simple, transparent framework, we believe we can deliver attractive risk-adjusted returns throughout the cycle, with a low or negative correlation to equities. While the UK onshore version only launched in October 2020, we have a longer-term track record with our offshore product, as shown by our returns below.

Calendar year performance for AXA WF Global Strategic Bond Fund

2020 2019 2018 2017 2016 2015 2014 2013
6.7% 9.55% 0.69% 4.19% 7.64% -1.47% 2.58% 2.48%

Source: AXA IM, 01/06/2020. Performance shown net of fees. Past performance is not a guarantee of future returns.

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 accruedinterest, 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.

Fixed income

What is unconstrained fixed income

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

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