Twelve-month review: AXA Global Strategic Bond Fund
- 25 October 2021 (5 min read)
For almost 10 years, AXA IM’s Global Strategic Bonds strategy has brought together the best ideas from AXA IM’s fixed income team – combining the breadth of global reach with the depth of local expertise.
The strategy – an unconstrained total return portfolio managed to a simple, transparent process – has been running successfully via an offshore vehicle for global investors. In October 2020, we launched an onshore version of the strategy. We brought the AXA Global Strategic Bond Fund to the UK market in response to client demand for a ‘core’ bond product offering diversified risk exposure and the flexibility to navigate a low yield, volatile market environment. We have designed this fund to have the potential to perform across the curve and through the cycle.
Performance
The fund has held up well since launch (19/10/2020), with a return of +1.1% to the end of September 2021.1 In the context of a period in which the all-maturity UK Gilt market has lost 7.7%2 , we believe this demonstrates the power of diversification and benefits of flexibility in delivering attractive risk-adjusted returns from a broad, global fixed income opportunity set.
The offshore version of the AXA Global Strategic Bond Fund has been running since mid-2012, providing a comparable longer-term track record. Since launch (15/05/2012), the offshore product has produced a cumulative total return of 41.9% (3.8% per annum), with an annualised volatility of 3.2% to 30/09/21 (hedged to GBP).3 The investment process is the same across both onshore and offshore products, though the former is hedged to sterling as base currency instead of the US dollar.
Five-year performance for AXA WF Global Strategic Bonds (offshore product)
|
30/09/2016 - 30/09/2017 |
30/09/2017 - 30/09/2018 | 30/09/2018 - 30/09/2019 | 30/09/2019 - 30/09/2020 | 30/09/2020 - 30/09/2021 | |
| AXA WF Global Strategic Bonds I (H) q GBP | 2.7% | 0.4% | 6.3% | 4.0% | 2.2% |
Source: AXA IM, Bloomberg, as at 30/09/2021, AXA WF Global Strategic Bonds I (H) q GBP. Net of fees.
Key themes and positioning
In the early months following the onshore fund’s launch in the fourth quarter of last year, we were adding risk to the portfolio in both emerging markets and developed market high yield. This proved beneficial as higher risk fixed income performed well into the end of 2020, buoyed by Covid-19 vaccine approvals, an improving macro backdrop and ongoing central bank support.
Most of the action in 2021, however, has been in government bond markets and this is where we have been quite active in tactically adjusting duration.
We came into the year structurally long-duration on the expectation that bond yields would continue to be supported against a backdrop of still accommodative policy and a great deal of price-insensitive buyers in the bond market. However, buoyed by much greater expectations for growth and inflation, we tactically hedged out all our US-dollar duration exposure in February when it became clear that the momentum was with higher yield levels (the “reflation” trade). That said, we saw the cheapening of yields as a potential buying opportunity and so started to cautiously build back our duration exposure, which worked well as bonds continued to surprise to the upside throughout the second and third quarters.
More recently, we have once again cut our exposure as fears around higher inflation for longer, together with slower growth, have caused markets to once again price in early interest rate rises, leading to another spike in yields.
In phases where we have been adding duration, we have done so by allocating out of 5-year Treasuries into 30-year Treasuries as when the market is rallying we want to be buying the more volatile end. In phases where the curve was steepening, we did the opposite. Essentially, we have been using the 5-year/30-year trade as an instrument to play the curve. This demonstrates our belief that the role of government bonds in an unconstrained strategy is not just for liquidity and as a credit-hedge, but they also offer the potential to make money.
Looking ahead, there are some key themes to our outlook and positioning, outlined below:
- We expect ongoing volatility in government bond yields as the macro and technical factors compete to be the key driver of markets. The ‘transitory’ inflation debate continues and this will be a fine balancing act for central banks, especially as they begin tapering bond-buying programmes at varying paces. We believe markets are currently pricing in early rate rises which may not materialise but markets will be volatile as expectations shift, while there is still plenty of uncertainty around Covid-19, supply chain disruptions and labour shortages. We will aim to navigate this through flexible duration management.
- We are wary of potential risk asset weakness in light of recent volatility in Asia and specifically Chinese property. So far contagion has been limited but the ongoing economic recovery has pushed corporate valuations higher and driven spreads ever tighter, which may come under pressure. Credit valuations may currently look expensive but the benefit of an unconstrained strategy is that we can pick out pockets of value and avoid the less attractive areas. We believe there are opportunities in lower-quality investment grade credit, especially European subordinated financials, particularly triple-Bs. We are also finding opportunities in select areas of US high yield. We prefer single-Bs and triple-Cs, which offer attractive yield and spread. Meanwhile, we are avoiding Asian high yield and are tactically using credit hedges (via credit default swaps) to dial our credit risk up and down.
A go-anywhere strategic bond fund
We believe investors can continue to benefit from a traditional strategic bond fund, which focuses on delivering attractive risk-adjusted returns throughout the economic cycle, with an ESG scoring objective. By structurally diversifying the fund across different risk buckets in fixed income, and using our flexibility to tactically adjust the portfolio, we believe we can deliver an attractive solution for investors, delivering steady returns with low equity correlation.
We will continue to update investors regularly on our onshore fund, as well as our wider fixed income views.
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Risks
The capital of the Fund is not guaranteed. The Fund is invested in financial markets and uses techniques and instruments which are subject to some levels of variation, which may result in gains or losses.
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.
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.
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.
The fund is also subject to geopolitical risk, securitised assets or CDO assets risk and contingent convertible bonds (“CoCos”).
Further explanation of the risks associated with an investment in this Fund can be found in the prospectus.
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[Name of sub-fund(s)] is a/are sub-fund(s)] of AXA World Funds. AXA WORLD FUNDS ‘s registered office is 49, avenue J.F Kennedy L-1885 Luxembourg. The Company is registered under the number B. 63.116 at the “Registre de Commerce et des Sociétés” The Company is a Luxembourg SICAV UCITS IV approved by the CSSF and managed by AXA Funds Management, a société anonyme organized under the laws of Luxembourg with the Luxembourg Register Number B 32 223RC, and whose registered office is located at 49, Avenue J.F. Kennedy L-1885 Luxembourg.
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Information concerning portfolio holdings and sector allocation is subject to change and, unless otherwise noted herein, is representative of the target portfolio for the investment strategy described herein and does not reflect an actual account . The performance information shown herein reflects the performance of a composite of accounts that does not necessarily reflect the performance that any particular account investing in the same or similar securities may have had during the period. Actual portfolios may differ as a result of client-imposed investment restrictions, the timing of client investments and market, economic and individual company considerations. The holdings shown herein should not be considered a recommendation or solicitation to buy or sell any particular security, do not represent all of the securities purchased, sold or recommended for any particular advisory client, and in the aggregate may represent only a small percentage of an account’s portfolio holdings.
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Risk Warning
The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.