As income investors increasingly seek diversification in their hunt for yield, unconstrained “strategic” bond funds have grown in popularity. At AXA Investment Managers, portfolio managers have been using their experience in implementing short-duration strategies to run a suite of funds that offer access to a wide range of fixed income asset classes while retaining flexibility to offset uncertainty about rate rises. Advisers can choose the fund that best suits their clients’ needs, taking into account risk appetite and return expectations.
The recently launched AXA Global Short Duration Bond Fund, run by senior portfolio manager Nicolas Trindade, has the ability to invest in attractive opportunities across the entire global short duration fixed income market. This includes inflation-linked, investment grade, high yield and hard currency emerging market bonds up to a maturity of five years. It aims to mitigate volatility while maximising returns, achieved, in part, by dynamically asset allocating across the global fixed income universe. The fund is also characterised by relatively high levels of liquidity (with 20% expected to mature each year on average), which may help lower transaction costs and allows active management while still meaning the fund can hold most bonds to maturity.
“In my view, investors have predominantly three ways to enhance yields: they can go down in credit quality, look globally for opportunities or extend maturities,” Mr Trindade explains. “Since the latter is not currently attractive due to flat yield curves and the threat of rising yields, investors are increasingly embracing global markets in their hunt for higher returns. Despite declining risk premiums across the board due to central banks’ bond buying schemes, yield opportunities are still available in the global credit market – depending on an investor’s risk appetite, the yield pickup can still be quite rewarding. By investing across the global fixed income market, investors can also benefit from enhanced diversification and therefore mitigate portfolio risk. Investors can have access to a wider range of sectors and geographies compared to single markets.
This fund sits alongside other short duration strategies at AXA Investment Managers that fall into five categories: inflation-linked, investment grade, emerging markets, high yield and global. Capitalising on 15 years’ experience managing short duration strategies, the newly launched global fund will leverage off this suite of local short duration funds in order to incorporate their best ideas. This affords investors the potential to benefit from dynamic asset allocation while achieving higher levels of diversification within their bond portfolio.
Looking more broadly, Mr Trindade believes there are real benefits to going global when it comes to bond allocation, particularly when incorporating emerging markets as well as high yield developed market bonds, although these opportunities also present higher risks. Indeed, AXA Investment Managers has been channelling extra resources into its research capability in emerging market debt, taking into consideration the vast array of opportunities coupled with the need for thorough due diligence. Overall, he identifies several key areas that make global bonds of interest.
He says: “If you are a UK or European investor, I think going global is quite attractive for three main reasons. Firstly, from a yield enhancement perspective, going global gives you access to different markets with some potentially higher yielding sectors found only in specific regions. Secondly, when you go global you can benefit from better diversification. For example, there are some sectors that are underrepresented in sterling and euros that are more readily accessible in dollars. Finally, you can benefit from cross-currency relative value opportunities. Some issuers issue globally in different currencies and sometimes they do not trade in line. A bond from one particular issuer can be cheaper in dollars versus euros, or cheaper in sterling versus dollars, for example – with the exact same underlying credit risk. One benefit of going global is that you can therefore buy an issuer’s bond in its cheapest currency.”