Fixed IncomeMay 11 2015

Fund Review: Axa Global Strategic Bonds

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Nick Hayes’s Axa World Funds Global Strategic Bonds fund is a relatively new offering in the strategic bond market, having launched three years ago in May 2012.

“The idea is a global unconstrained fixed income fund, [which] can access any part of the fixed income markets where Axa has capabilities,” the manager explains. “We are pretty big in government bonds and in investment grade, high yield and emerging market debt.”

The fund does not have a benchmark, although Mr Hayes uses an approach, or “framework”, that splits the market into three different risk buckets.

He elaborates: “We have our core defensive or core government bonds allocation, then we have what we call the intermediate risk – which is investment-grade debt – [followed by] the more aggressive bucket of high yield and emerging markets. The main alpha or performance comes from the asset allocation across those three buckets and deciding whether we want to be long or short duration, increase or decrease our allocation to high yield or investment grade, and then within that thinking about whether the more attractive market is the US or Europe.”

The portfolio cannot have more than 60 per cent in high yield and emerging markets or more than 60 per cent in investment grade, and it has an upper limit duration of eight years. He notes: “Broadly speaking, I think 70-80 per cent of the alpha will come from a top-down, macro asset allocation-type driver and 20-30 per cent will probably come from bottom-up stock picking.”

The fund ranks lower down the risk-reward spectrum at just level three, while an ongoing charge of 0.73 per cent applies to the clean F retail share class.

In spite of a fairly short track record, the fund has already produced a respectable performance, data from FE Analytics shows. In the 12 months to April 29 this year, the vehicle generated a 12.08 per cent return, placing it second quartile in the FO Fixed Interest Global sector, which delivered just 5.64 per cent in the same period.

Mr Hayes suggests the fund has increased roughly 17-17.5 per cent in the three years since launch. But he also keeps a close eye on volatility, which he notes has remained below 3 per cent for the past three years. “We are certainly not the most aggressive strategic bond fund out there and we’re not aiming to be the most aggressive,” he maintains.

“We think about fixed income markets in a risk adjusted way and we want attractive returns with reasonably low volatility, which is why we have that very strong emphasis on diversification. That’s why we will always have some government bonds. They’re not cheap and they’re not attractive, but they do offer some element of diversification and reduce the volatility of funds.”

The manager observes the performance of government bonds in 2014 has added to the portfolio’s performance in the past 12 months.

He notes: “We started the year with a very low two-and-a-half years of duration, increased it during the summer, which obviously did quite well as government bonds continued to rally. We then brought that back down again at the start of 2015 to two-and-a-half years, which did well in the big sell-off in February and early March.

“We’re starting to increase our duration at the moment, partly driven by an asset allocation away from high yield and emerging markets. We used to have 50 per cent high yield and emerging markets roughly 15-16 months ago and now that’s reduced to 35 per cent. We still like high yield but we like it less than we used to because we think the risks have slightly increased.”

Mr Hayes has begun to reallocate his portfolio from European assets into US assets ahead of an expected interest rate hike this year by the US Federal Reserve.

He adds: “So what you should see, and you’re already seeing it to a certain extent, is much higher yield in US treasuries and spreads in US investment grade and high yield than you’re seeing in Europe, for example. We think at some point the difference between yields and spreads in the US against Europe will become so attractive that we will start to buy even more US investment grade and US high yield.”

EXPERT VIEW

Jake Moeller, head of Lipper UK & Ireland research, Thomson Reuters

This is a relatively new fund on the block but it sits well with Axa Investment Managers’ extended strategic suite. The fund was launched as its sector appeared to become increasingly fashionable and it doesn’t have the pedigree of other portfolios. However, companies with large associated life books dedicate themselves to long-term and conservative management. I’ve often felt that Nick Hayes may be spread a bit thin with his other duties at Axa, but he is certainly experienced and the firm has an impressive array of global resources in its bond management armoury.