AXA WF Global Aggregate Bonds is a multi-currency and aggregate fund which exploits a large variety of alpha sources, such as curve positioning, currency, duration, inflation, asset allocation, and bond selection. The funds benefits from the support of specialized local credit teams (USD, JPY and GBP) in charge of sector allocation and local bond selection.
AXA WF Global Aggregate Bonds invests in a broad category of asset class: treasuries, government-related bonds, corporate bonds and securitized assets. It aims to provide income with capital stability.
Performance Review 2005
Alexandre Menendez: "In 2005, fixed income yields were globally stable, but the portfolio benefited from the positive carry of the assets. The main driver of the fund positive performance came from foreign exchange markets with a sustained USD appreciation against EUR (base currency of the fund)."
Performance Review 2006
Alexandre Menendez: "In 2006 the global rise in yields for fixed income assets was the main burden to the fund performance despite positive carry effects. JPY and USD depreciation against EUR was also a negative contributor to the fund absolute performance. Finally, the 2007 performance was negative due to both FX moves and bonds effects."
Performance Review 2007
Alexandre Menendez: "In 2007, subprimes crisis made the headlines, leading to a strong volatility in Fixed Income markets. Before summer, the housing bubble was still growing and while rates were rising the fund performance was on a negative trend. But as soon as the bubble exploded, the “fly-to-quality” into core fixed income investments pushed the rates down and led to a strong positive performance. However, both weak USD and JPY versus EUR weighted negatively to the absolute fund performance."
Performance Review 2008
Alexandre Menendez: "In 2008, markets went through a troubled and volatile period for risky assets. In September, just after Lehman Brother’s story, credit spreads widened drastically and the “fly-to-quality” triggered the fixed income rates to drop sharply. Thanks to its asset allocation the fund took some strong benefits from the rate rallies from governmental bonds and the performance was therefore not hurt by the occurring pressure on credit spreads. The only fly in the ointment was the JPY and USD depreciation in December, which has slightly limited the benefits of the rates rally at the end of the year."
Performance Review 2009
Alexandre Menendez: "2009 was full of uncertainties, and therefore both rates and currencies were volatile throughout the whole period. Fund performance was subject to the same variations but managed to keep a slight positive trend since May, thanks to an asset allocation which benefited from the improvement in corporate sector."
Performance Review 2010 - Year-to-Date
Alexandre Menendez: "In 2010, the US, Japanese and “Core” Euro rates were on a downward trend, mainly due to the debt concerns over Euro peripheral countries (Greece, Italy, Portugal, Spain…). As credit spreads were strongly correlated to the latter, they widened as well, but the fund managed to avoid this negative trend and to take benefit from the rally of “Core” rates (German treasuries, US Treasuries…). The positive performance was slightly affected the second part of the year due to a strong depreciation of USD against EUR."
Performance since 2005
Alexandre Menendez: "From 2005 to 2010, the fund managed to take benefit from the fixed income rates (both carry and yield downward trend) and currency moves to get a positive performance. As soon as market conditions started to worsen in mid-year 2007, the portfolio found positives source of alpha through its asset allocation in government bonds. (“fly-to-quality” effect and downward trend in fixed income yields). In 2009 positions on credit gave an additional positive performance with corporate spreads tighter. Finally in 2010, the fund went trough the Euro peripherals crisis by taking profit from the rates rally and did not suffered a lot from its European peripheral country exposures."
Investment Process and Strategy – How does the Fund Manager Invest?
Investment Philosophy
AXA IM’s fixed income investment philosophy is tailored to create value in a growing and increasingly complex fixed income market, based on the following principles:
- Specialised Teams: A specialist approach is needed in response to the growing segmentation in fixed income markets.
- Active Management: A blend of top-down and bottom-up approaches allows us to capture multiple sources of added value in the short and medium to long-term.
- Full integration: Optimal decisions result from the integration of credit research and risk management in the investment process. In particular, the emphasis on intensive fundamental credit analysis is critical to mitigating the risk of principal loss.
- Consistent and repeatable performance: Our objective is to generate regular and repeatable added value in line with client objectives.
This philosophy is reflected in our investment process, which has been constructed in order to exploit the opportunities and sources of alpha derived from our core beliefs.
• Government Bonds:
- Duration: profit from the volatility of global interest rates with a dynamic management of the duration in the fund +/- 25 % compared to the reference index.
- Curve positioning: profit from economic cycles expressed through positioning on the government curve (steepening, flattening and barbells).
• Inflation-linked: profit from directional views on European and global inflation, inter country inflation, real interest rate versus nominal rates arbitrage.
• Currency: Monitoring and analysis of key signals on currencies: Carry signal, Change of interest rates, momentum, Real exchange rate reversion
• Credit: profit from credit positioning, seniority arbitrage, basis trade, sector arbitrage, swap correlated and issuer selection.
Investment Process
Our fixed income investment process is designed as a disciplined, repeatable and consistent process. It is organised in five distinct steps, fully integrating research, and is supported at each stage by three pillars:
• Portfolio Managers
• Portfolio Engineering Group
• Credit and Macro Research
Our continuous and dynamic 5-step investment process is presented below:
Step One: Economic and Market Assessment
The global investment outlook is determined in the first step of the investment process by the fixed income Forecasting Group who meets on a bi-monthly basis.
This group is comprised of:
• All fixed income portfolio managers
• Research teams (Investment Strategy team and Credit Research team)
• Portfolio Engineering Group Through regular and formal meetings, the Forecasting Group collectively develops macro-economic outlook using our strategists’ estimates and our portfolio managers’ analysis in the form of a multi factor scoring system:
Step Two: Active Strategy
The output of step one is used to formulate the team’s Active Strategies (the Active Strategy Sheet) which summarises the strategies which will be used by the team members and defines a clear portfolio framework. It expresses the common strategies in terms of tactical allocation (credit versus government bonds), tactical sector allocation and issuer curve positioning.
The active strategies serve mostly as a framework and do not remain static over time. They reflect real market conditions and serve as a way for AXA IM to remain consistent in its views within and across fixed income teams. Between fixed income Forecasting Group meetings, market information and investment opportunities are regularly discussed by all fixed income portfolio managers and strategists.
AXA WF Global Aggregate Bonds Fund gives a particular attention to asset allocation and credit expertises as an alpha source. Therefore after defining our market views during the forecasting group (Step 1 of the investment process), the Global Rates Team decides on the active asset allocation between Government related and Credit holdings. In line with our “top down” market views, the team decides also of the active allocation within 3 major credit areas: Asian Credit, USD Credit and GBP Credit.
Focus on Asset Allocation Alpha Source:
Each local specialised credit team receives its allocation and decides both its own active sector allocation and bond selection (“Bottom up” approach). Exchanges between the principal portfolio manager of the AXA WF Global Aggregate Bonds fund and the three local Credit team experts are made on a regular basis to ensure that the positions of the fund are in line with the team forecasting views.
Step Three: Portfolio Construction
Once the active strategies have been decided, it is the responsibility of each portfolio manager in the team to implement these in the portfolios for which they are responsible, taking into account client and regulatory guidelines. The allocation between strategies as well as the choice of instruments and issue selection is the responsibility of the portfolio manager supported by the desk analysts and the portfolio engineers.
Particular attention is given to the selection of the best debt structure (based on seniority, maturity, liquidity covenants, position on the issuer curve) and the instruments providing optimum exposure (cash bonds, credit default swaps, repos).
In order to optimise the calibration of the portfolio, the fund manager works closely with the Portfolio Engineering Group (PEG) in order to quantify the active strategies within the given investment guidelines. Portfolio managers are supported by AXA IM’s centralised trading platform for the implementation.
Step Four: Risk monitoring and control
Portfolio engineers, working alongside with portfolio managers, are involved at every stage ensuring:
• Consistency between risk exposures and the active strategy sheet is checked
• Risk is monitored for consistency with client constraints
• Risk is defined and tracked systematically using a suite of analytical in-house tools
• Portfolio risk/return trade-off is enhanced
In addition, an independent risk management team ensures consistency with regulatory constraints.
Step Five: Continuous strategy review
Portfolio managers are always on the lookout for market information, sources of which include macro-economic and credit research, other investment teams, the dealing desk and external resources. In the case of a major market event leading to a general change in our global investment outlook, an extraordinary meeting of the Forecasting Group is convened.
Investment Outlook
Alexandre Menendez: "Our core scenario is for a continued sluggish GDP growth for 2011 in the developed markets as the process of de-leveraging continues in the household and financial sectors. The prospect of widespread fiscal tightening also creates downside risks. However, there is strength in emerging markets and the corporate sector is cash rich. These positives mean a “double-dip” could be avoided. Inflation is not an issue in the near term, other than in the UK where official inflation numbers remain uncomfortably above the Bank of England’s target. The major risk to inflation in the near term comes from food prices, especially in emerging markets. Weaker economies are likely to come under pressure again. This will be particularly so in Europe where the recent performance of the German economy has accentuated the divergence. The bar of matching German economic performance is continually being raised for other European economies and markets are increasingly of the view that the peripherals do not have the ability nor the political stomach to do this. This is likely to mean continued volatility in country spreads. We see little scope for any further significant decline in government bond yields and little scope for any renewed narrowing of credit spreads. As such, returns in the remainder of the year will be less strong than in 2010 to date. At the same time the risk is that government yields back up and credit spreads widen. From an investment point of view, the search for value in the bond market is difficult at this juncture. Overall credit market yields are low compared to nominal GDP growth and compared to yields on equities. The Basel III agreement has provided a boost to subordinated bank debt, which was an area of the market still offering attractive yields. We do not subscribe to the idea of a bond bubble as there are clear fundamental reasons why yields have fallen this year. However, nor do we subscribe to the Japan scenario of persistent stagnation in nominal GDP growth. As such we see the biggest strategic risk to bond investors being a reversal in some of this year’s decline in yields. Corporates are healthy but we need to watch how equities react to the deteriorating macro environment. Debt is cheap for corporates and issuance is likely to be heavy as companies raise capital, replace equity with debt, term out existing borrowing, pay off bank financing and finance corporate activity."
