This is a sponsored article from AXA Investment Managers.
In a volatile market where investors are switching rapidly between risk-on and risk-off positions, AXA Investment Managers (AXA IM) believes that investors should consider strategic allocations into short duration bond strategies, with the asset manager preferring direct investments rather than using derivatives to artificially reduce durations.
In an environment of rising government bond yields – the US Federal Reserve is expected to lift rates at least once more this year – short duration bond strategies tend to outperform relative to the broader all-maturities credit market.
This is because short duration bonds are, by their nature, less sensitive to changes in bond yields and credit spreads. The attractive maturity profile of these strategies is associated with regular cash flows, which can be reinvested at higher yields in the market.
In addition, short duration investing offers limited volatility and drawdowns relative to the broader market – an attractive proposition in today’s uncertain investment climate.
On the other hand, as credit spreads tighten, or when government bond yields decline, short duration bond strategies typically underperform the broader credit market.
Direct approach versus derivatives
Investors use two main approaches when employing short duration bond strategies: direct investments into short-dated corporate bonds, and investments across the maturity spectrum while using derivatives to artificially decrease the duration of the portfolio.
AXA IM favours the direct investment route, partly because the derivatives approach can lead to sub-optimal returns and diminished liquidity.
The asset manager explains that as the underlying bonds of derivatives mature farther out in the future, even if the interest rate risk is reduced through derivatives, the credit spread risk may still be high – which can ultimately have a negative impact on risk-adjusted returns.
More importantly, strategies using the derivatives approach do not benefit from attractive natural liquidity profiles, as many of their underlying bonds mature much farther down the line. This implies higher transaction costs and these strategies missing out on higher yields and additional liquidity buffers.
With a number of market risks looming through the remainder of 2017 – investors will be keeping an eye on central banks’ monetary policies, Donald Trump’s policy implementation and Brexit negotiations – volatility could remain high and AXA IM says that direct investments into short duration bonds are compelling.
This is for information purposes only and does not constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services and should not be considered as a solicitation or as investment advice. The content herein may not be suitable for retail clients. No financial decisions should be made on the basis of the information provided.
In Singapore, this document has been issued by AXA Investment Managers Asia (Singapore) Ltd. (Registration No. 199001714W). In other countries, this document has been issued by AXA Investment Managers Asia Limited. References to “AXA IM Asia” below shall be references to AXA Investment Managers Asia (Singapore) Ltd. or AXA Investment Managers Asia Limited as appropriate. This document has not been reviewed by the Securities and Futures Commission in Hong Kong (“SFC”).
This document has been prepared and issued for private informational and educational purposes only at the sole request of the specified recipients, and not intended for general circulation. They are strictly confidential, and must not be reproduced, circulated, distributed, redistributed or otherwise used, in whole or in part, in any way without the prior written consent of AXA IM Asia. They are not intended for distribution to any persons or in any jurisdictions for which it is prohibited.
To the maximum extent permitted by law, AXA IM Asia makes no warranty as to the accuracy or suitability of any information contained herein and accepts no responsibility whatsoever for errors or misstatements, whether negligent or otherwise. Such information may be subject to change without notice. The data contained herein, including but not limited to any backtesting, simulated performance history, scenario analysis and investment guidelines, are based on a number of key assumptions and inputs, and are presented for indicative and/or illustrative purposes only.
The information contained in this document is not an indication whatsoever of possible future performance and must be considered on this basis. . Information herein may be obtained from sources believed to be reliable. AXA IM Asia has reasonable belief that such information is accurate, complete and up-to-date. Any views, opinions or recommendations (if any) that may be contained in such Information, unless otherwise stated, do not reflect or constitute views, opinions or recommendations of AXA IM Asia.
This document has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation or particular needs of any particular person. Nothing contained within this document shall constitute an offer to enter into, or a term or condition of, any business, trade, contract or agreement with the recipient or any other party. This document shall not be deemed to constitute investment, tax or legal advice, or an offer for sale or solicitation to invest in any particular fund. If you are unsure about the meaning of any information contained in this document, please consult your financial or other professional advisers. The data, projections, forecasts, anticipations, hypothesis and/or opinions herein are subjective, and are not necessarily used or followed by AXA IM Asia or its affiliates who may act based on their own opinions and as independent departments within the organization.
Investment involves risks. You should be aware that investments may increase or decrease in value and that past performance is no guarantee of future returns, you may not get back the amount originally invested. Investors should not make any investment decision based on this material alone.
© AXA Investment Managers 2017. All rights reserved
This is a sponsored article from AXA Investment Managers.