In an environment where interest rates remain at historically low levels, investors are struggling to generate income from cash accounts, preferring instead to chase yield in other asset classes. Bonds, in particular, have offered – and, indeed, continue to offer – interesting characteristics, although many anticipate that they may begin to wane as the 30-year-long bull market draws to a close. According to Nicolas Trindade, senior portfolio manager at AXA Investment Managers, it is more important than ever for investors to assess the duration and credit risks in their fixed income allocations.
He says: “Bonds are still perceived to some extent as safe haven assets, but I think investors now understand the asset class much better than they did, say, 10 years ago. Right now, duration is a much greater focus for investors because they understand that if yields rise and you have a long duration, this will have a negative impact on the performance of your fixed income allocation.
“In terms of credit risk, risk premiums have significantly decreased over recent years. That is mostly due to central banks buying corporate bonds and pushing investors down the credit spectrum to still get attractive yields. As such, bottom-up credit research is especially important for minimising downside risk in the current environment, as investors who take on the same level of risk are receiving lower returns than they were this time last year.
As it stands, Mr Trindade suggests investors should consider short duration strategies to make the most of an uncertain outlook for yields. To this end, AXA Investment Managers has a number of offerings that invest in bonds with maturities of five years or less, with the aim of maximising yield while limiting drawdowns and reducing overall volatility.
One of these is the AXA Sterling Credit Short Duration Bond fund, which is managed by Mr Trindade and aims to also reduce overall transaction costs by maintaining a high level of liquidity. It is targeted at investors who are looking to re-risk out of cash in order to get incremental returns in excess of cash, or those seeking to de-risk their fixed income allocation.
Meanwhile, the newly launched AXA Global Short Duration Bond fund, which is also managed by Mr Trindade, invests in a variety of global fixed income markets, including inflation-linked, investment grade, high yield and hard-currency emerging market bonds. Similarly, the AXA World Funds Global Inflation Short Duration Bond fund, which was launched last year and is managed by Jonathan Baltora, targets diversification across global markets, with an emphasis on mitigating inflation risk through skilled active management.
Mr Trindade adds: “In an environment where economic activity picks up, you should expect to see higher government bond yields and tighter credit spreads. It therefore makes sense to be invested in short duration credit assets in either investment grade or high yield to benefit from this spread tightening but to mitigate the effect of rising yields.
“The first step for investors when building a fixed income allocation is to look at its duration and make sure it reflects the macroeconomic views they have of the market.