HEAD-TO-HEAD: Axa versus Invesco

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Investment process

Both the Axa and Invesco funds are available for sale to retail investors in Hong Kong and have a mandate to invest in UK investment grade bonds.

Although both have relatively similar risk levels in terms of their credit ratings, both products are very different in terms of duration risk, according to McDermott.

Credit ratings allocation

Source: Fund factsheet

“The Axa fund takes a much more defensive stance by focusing on companies with expected maturities within five years and issued by companies unlikely to default during that period,” he said.

McDermott does not have the average duration of the fund, but using the top ten holdings as a proxy, the product’s duration should be around three years.

The Axa fund manager also typically holds these bonds to maturity to reduce trading costs, McDermott added, noting that the portfolio is diversified and structured in a way that around 20% of the holdings mature each year.

Turning to the Invesco fund, McDermott said that the fund’s duration is longer. Around a third of the companies in the portfolio have a duration of at least 15 years, with the overall product having an average duration of nine years.

Given that the Invesco has a longer duration focus than the Axa product, it pays a greater yield, McDermott explained. According to Morningstar Direct data, the trailing 12-month yield of the Invesco fund is 2.15%, which compares to the 0.97% of the Axa fund.

In addition, the Invesco product has around 30% of its holdings in overseas holdings, which compares to just 10% of the Axa fund.

“The managers of the Invesco fund have used the flexibility of the fund’s remit to invest in some euro- and dollar-denominated corporate bonds, with currency exposure hedged back to sterling.

“They think the UK consumer will be dampened by further Brexit uncertainty, stagnant house prices and stricter borrowing conditions in the short-term,” McDermott said.

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