Fixed income investors should be de-risking their exposure amid signs that the decade of growth in the US is coming to a close, AXA Investment Managers' Nicolas Trindade has said.
The current expansion in the US is poised to become the longest ever at the end of this month, surpassing the boom experienced during the 1991-2001 Clinton-era. That expansion lasted a total of 120 months, a figure poised to be matched imminently by the current cycle which began back in June 2009.
Trindade, manager of the £240m AXA Global Short Duration Bond fund, said during this time fixed income markets had delivered impressive returns, but he warned it was now time to de-risk portfolios.
"The expansion in the US is the second longest in history and looks set to become the longest ever, but it also means recession is getting closer, as illustrated by the inversion of the US treasury yield curve," he said.
"When you combine that with a shift to de-globalisation, weak manufacturing surveys and the potential for trade wars to continue and escalate, it means we expect a slowdown in global growth."
A dovish switch by central banks at the beginning of the year is a new twist to the story, and has supported markets performance so far, but Trindade warned this was a one-off positive. "Bond markets have already enjoyed a boost from this dovish pivot by central banks including the US Federal Reserve, which said there would be no more rate hikes this year, and potentially cuts, but that boost cannot happen again.
"That dovishness is now more than priced in, with three Fed cuts already expected within the next 6 months, meaning the market has set itself up for disappointment."
As a result, and with other political and geopolitical risks mounting - including tensions between the US and Iran, Brexit, and increasing risks of higher prices for US consumers due to the trade war - Trindade said it was time to de-risk fixed income allocations and take some profits on a very good year so far.
"There is a solution for investors who want to de-risk but don't want to sacrifice yield, as global short duration strategies have demonstrated," he said.
"These can allow investors to maintain fixed income allocations while maximising risk-adjusted returns by limiting volatility and drawdowns."
For example, he said the AXA Global Short Duration Bond fund currently offers a yield that is 80% as high as the yield available on the broad sterling corporate index, while carrying only 25% of the interest rate risk. It is also three times less volatile and has a much lower exposure to the UK, making it more Brexit proof.
Please see figure 1 below to view the fund's performance since launch.
The capital of the Fund is not guaranteed. The Fund is invested in financial markets and uses techniques and instruments which are subject to low levels of variation under normal market conditions but which may still result in 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.
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.
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.
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.
Geopolitical Risk: investments issued or traded on markets in different countries may involve the application of different standards and rules (including local tax policies and restrictions on investments and movement of currency), which may be subject to change. The Fund's value may therefore be impacted by those standards/rules (and any changes to them) as well as the political and economic circumstances of the country/region in which the Fund is invested.
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.
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.
Notes to Editors
All data sourced by AXA IM as at Monday 08 July, 2019.
Fig. 1 - AXA Global Short Duration Bond fund discrete performance since launch