Global Short Duration strategy - The rally continues, but the risks around a second wave increase
- 10 July 2020 (10 min read)
Key points
- Credit spreads tightened further following widespread easing of restrictions
- The risks around a second wave increased
- We kept on adding to attractive opportunities in high yield and emerging markets
What’s happening?
- Credit spreads kept on tightening in June, as optimism grew around the recovery in the global economy following widespread easing of restrictions in developed countries and improving economic data. However, fears of a second wave created nervousness.
- The US Federal Reserve began to purchase individual corporate bond issues, rather than just corporate bond ETFs, while the European Central Bank significantly increased the size of its emergency bond-buying programme to €1.35 trillion.
- Despite the risk-on environment and the prospect of higher borrowing, US treasury, German bund and UK gilt yields were slightly lower at the front-end as they remain anchored by central bank support.
Source: AXA IM as at 30/06/2020. The data is based on a representative account that follows the strategy and is not intended to represent actual past or simulated past performance of the strategy. Past performance is not a reliable indicator of future results. Performance calculations are net of fees, based on reinvestment of dividends.
Portfolio positioning and performance
- Sovereign: We remained invested in short-dated US treasury inflation-linked bonds due to attractive valuations.
- Investment Grade: We continued to gradually reduce our bias towards investment grade in the Fund in order to capture attractive opportunities in high yield and emerging markets. We were still active in primary markets, buying one attractive new issue in US dollar.
- High Yield and Emerging Markets: We continued to add to high yield and emerging markets, participating specifically in several Asian high yield new issues. Due to the gradual re-risking undertaken since late March, we now have a 32% allocation to high yield and emerging markets (up from 19% at the end of February).
Outlook
Despite all advanced economies forecast to be in recession this year, we have now experienced the shortest bear market ever in credit markets due to the unprecedented monetary and fiscal support.
With the outlook remaining very uncertain and valuations having recovered a long way, we are growing cautious on adding more beta risk at this point and would rather focus on specific pockets of value that have lagged the recovery so far.
Asset class breakdown
Portfolio breakdowns
No assurance can be given that the Global Short Duration strategy will be successful. Investors can lose some or all of their capital invested. The Global Short Duration strategy is subject to risks including credit risk, liquidity risk and interest rate risk and counterparty risk. The strategy is also subject to derivatives and leverage, emerging markets and global investment risks.
Sources
[1] Yield and duration calculations include cash held within the portfolio, use the next-call method for all Financials in the portfolio and duration/yield-to-worst for all other holdings. The yield is calculated gross of fees. Please note that the yield calculations are based on the portfolio of assets and may NOT be representative of what clients invested in the strategy may receive as a distribution yield. Yields are not guaranteed and will change in future.
[2] Rating is the worst of S&P, Moody’s and Fitch. In the rare case of an unrated issuer we will assign an internal credit rating.
[3] Representative Account has been selected based on objective, non-performance based criteria, including, but not limited to the size and the overall duration of the management of the account, the type of investment strategies and the asset selection procedures in place. Therefore, the results portrayed relate only to such accounts and are not indicative of the future performance of such accounts or other accounts, strategies and/or services described herein. In addition, these results may be similar to the applicable GIPS composite results, but they are not identical and are not being presented as such. Account performance will vary based upon the inception date of the account, restrictions on the account, along with other factors, and may not equal the performance of the representative accounts presented herein. The performance results for representative accounts are net of all fees and reflect the reinvestment of dividends or other earnings.
[4] Any Emerging Market Sovereigns are classified under “Sovereign” for the purpose of this breakdown.
[5] Any Emerging Market Sovereigns are classified under “Emerging Markets” for the purpose of this breakdown.
Not for retail distribution: this document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it 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 solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.
Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales, No: 01431068. Registered Office: 22 Bishopsgate, London, EC2N 4BQ. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.
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.