Survey confirms favour for fixed income 

The overall results were perhaps unsurprising in a low-rate environment, with respondents demonstrating a continued recognition of the benefits of fixed income exposure, particularly for those clients seeking an income but not prepared to take on undue risk.

Indeed, when asked how likely they were to recommend a bond fund over the next 12 months, 51.4 per cent stated they were “very likely” to, with a further 35.8 per cent saying they were “potentially likely” to. 

“The results were in line with what we have experienced at AXA Investment Managers”, says Nicolas Trindade, fund manager of the AXA Sterling Credit Short Duration Bond fund.

“We have continued to see clients seeking fixed income and, specifically, looking for some exposure to high yield, which was clearly demonstrated in the survey.

"It makes sense in the current low yield environment, where advisers are having to work hard to find sources of income. There has also been some more focus on short duration funds, including investment grade ones as a step-up from cash, as market expectation is for yields to rise globally.”

Interestingly, when asked about the key drivers behind their recommendation in a bond investment, there was a focus on the track record of the fund manager (44.9 per cent) and the reputation of the fund house (19.3 per cent), as well as the underlying strategy and holdings.

This kind of strategy allows you to potentially capture higher yields over the life of the fund due to the ongoing reinvestment of maturing bonds.

There was also a real interest in third-party investment solutions, with 58.2 per cent of respondents answering that they would “prefer to invest in fixed income as part of a multi-asset portfolio for a less sophisticated investor, over a plain bond fund”. 

Mr Trindade comments: “When you are an adviser one of the key things is making sure the company you invest with is sound, with proper risk controls in place and a strong background in the area of the market you are looking to invest in.

AXA Investment Managers has a well-deserved reputation in the fixed income space and, specifically, is a respected leader in short duration strategies, which look set to be the dominant theme of 2017.

Indeed, 51.7 per cent of respondents said they were ‘very likely’ to recommend a short duration strategy in the future.

Mr Trindade adds: “In terms of why advisers might opt for a multi-asset fund, one thing is for sure: the global macroeconomic backdrop is much more technical now than it was 10 years ago. We have competing central banks with divergent monetary policies, as well as credit cycles that are not necessarily in tune across the world.

"I have a lot of sympathy for advisers who want to delegate the allocation across regions and across asset classes to one asset manager so they can do it on their behalf.” 

Meanwhile, Mr Trindade believes AXA Investment Managers’ popularity in the short duration space is aided by the simple investment philosophy that underpins the funds, which is to seek to avoid the defaults and collect the coupons, by investing directly in short dated bonds. 

“We want to make sure that we capture potential income while minimising default risk,” he says. “Also, one of the beauties of short duration strategies is their flexibility. In an environment where you expect interest rates to go up – as we do at the moment – this kind of strategy allows you to potentially capture higher yields over the life of the fund due to the ongoing reinvestment of maturing bonds.”

While the results of the survey may suggest a conflict between advisers opting for fixed income as a cautious investment in volatile times (42.1 per cent), while also favouring high yield options for those investors who match the risk profile (87.5 per cent), Mr Trindade suggests duration is the main source of risk in the current climate.

The technical backdrop is less supportive than it was a year ago and the political risk is higher.

He says: “If you look at the duration of the sterling corporate bond market, it is around 9 years. The volatility you get from such long duration is quite high and I think investors want yield but without taking on such risk.

"Many have therefore decided that rather than taking on duration risk in their fixed income portfolio, they would rather take credit risk because they are have the potential to be better remunerated for it.”

Certainly, Mr Trindade anticipates challenging conditions ahead, which should further drive interest in to shorter duration strategies in particular and fixed income as a whole. A pick-up in economic growth across the major global economies is set to be tempered by political uncertainty and changing monetary policy. 

“We have the Dutch, French and German elections coming up this year in Europe, we have the Brexit negotiations in the UK, as well as uncertainties around the Trump administration’s ability to implement its pro-growth agenda in the US,” Mr Trindade explains.

“On top of that, the European Central Bank is going to start trimming QE from April onwards and we have already seen the Bank of England end sovereign QE and it also looks likely to be done with corporate QE too by early April. The technical backdrop is less supportive than it was a year ago and the political risk is higher.

“From our perspective, we expect higher yields in the UK market, driven by reflation in the US, which is an important theme for 2017. We see that spreads are going to widen because of tight valuations, a less supportive technical backdrop, as well as the Brexit negotiations, which we expect to be very difficult. 

“Overall, the findings of the survey painted an accurate picture of what is going on in the fixed income space and I would expect these results to remain relevant for quite some time because, in spite of challenges, there will always be a need for income in this low yield environment and in my opinion one of the best places to find it is fixed income.”

Nicolas Trindade is portfolio manager for AXA Investment Managers.

Nicolas joined AXA IM in 2006 and is a Senior Portfolio Manager within the Active Sterling Credit team. He manages both retail and institutional funds, with additional responsibility for coverage of the financial sector within the “Portfolio Manager Analyst” credit research organisation. Nicolas is the lead Portfolio Manager of the AXA Sterling Credit Short Duration Bond Fund and the AXA WF Global Credit Bonds. He is also Deputy Manager of the flagship AXA WF Global Strategic Bonds.

Nicolas holds an MSc in Diplomacy and International Strategy from the LSE as well as a Master’s Degree in IT Engineering from Telecom SudParis. Nicolas is a CFA Charterholder.

*177 UK based financial advisers were surveyed 

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