HEAD-TO-HEAD: Axa versus M&G

123456

Investment approach

The Axa philosophy combines bottom-up fundamental credit analysis and top-down macroeconomic research, according to McDermott.

“It is based on the managers’ belief that interest rates, inflation and default risk fluctuate through the economic cycle. Therefore, the managers’ active framework is based on the analysis of macro, valuation, sentiment and technical indicators,” said McDermott.

The objective of the fund is to generate an income return combined with any capital growth. The mangers invest primarily in sterling-denominated investment grade bonds issued by companies with a bias towards shorter maturities (less than five years) with the aim of reducing the effect of fluctuations in interest rates.

“Top-down views will tend to generate sector allocation, while the bottom-up fundamental value strategy will determine investments in specific corporate bonds,” said McDermott.

In order to reduce risk, the fund invests in high quality bonds with only a short time to maturity, which limits exposure to the risks of changing interest rates, he noted.

“This cautious approach is consistent with the investment objective of the fund and the strategy of the manager, he said.

The investment strategy of the M&G fund is based on the principle that returns in the corporate bond market are driven by a combination of macroeconomic, asset, sector and stock-level factors, according to McDermott.

“As different factors dominate returns at different stages of the economic cycle, manager Richard Woolnough therefore applies a dynamic investment approach,” he said.

“Woolnough changes the blend of duration and credit exposure in the portfolio to give appropriate weight to those drivers of returns at each stage of the economic cycle.”

The strategy invests primarily in investment-grade bonds (typically over 90%) but has the flexibility to hold up to 20% in both government bonds and high-yield bonds. Its duration is actively managed within plus/minus 1.5 years of the Markit iBoxx GBP Corporates Index. Woolnough’s expertise in macroeconomic analysis and fixed-income investing underpins the investment process. It combines his macro views with bottom-up recommendations from M&G’s 37-strong credit analyst team. The fund is managed without reference to a benchmark.

In constructing the portfolio, Woolnough decides the proportions to be held in the various asset classes, as well as which individual bonds to own, according to McDermott.

“He forms a macroeconomic overview for the fund, comparing his and the team’s views on factors such as economic growth, inflation and the yield curve, with the market’s expectations,” he said.

“In light of this analysis, he will, for example, lengthen or shorten the fund’s duration depending on his outlook for interest rates. The flexibility allows Woolnough greater investment freedom and enables him to take a high-conviction approach when selecting credits for the portfolio.”

Fund characteristics:

Source: Morningstar

Top 10 holdings:

Source: Fund factsheets, FE Fundinfo: 30 Jun 2021*, 31 May 2021**

123456