HEAD-TO-HEAD: Axa vs Pimco

123456

Investment process

Both the Axa and Pimco funds invest mainly in high yield bonds using a bottom-up process for security selection, according to Dobrescu.

“That is the case for most high yield funds. When you are managing a high yield portfolio, your main objective is to really undertake due diligence on each issuer in the portfolio. You need to absolutely make sure that the issuer is unlikely to default over your expected investment horizon,” she said.

The main difference between the two products is the amount of risk each manager takes: the Axa fund is more aggressive in terms of investing across the credit rating spectrum compared to the Pimco fund.

“The managers of the Axa fund are not afraid to hold significant stakes in CCC-rated bonds, so long as they are confident in the quality of the work they have done to select those bonds.”

Around 17% of the Axa fund’s assets are invested in CCC bonds, Dobrescu said, noting that this may have been the lowest exposure the product has ever had in the CCC space. In 2014, for example, CCCs accounted for 34% of the portfolio.

“Depending on market conditions, the managers can definitely take a lot more [exposure] in that space,” she said.

Given the amount of CCC bonds in the Axa portfolio, the fund managers manage risk by focusing on bonds that are fairly close to their maturity date, which is usually less than three years, according to Dobrescu.

“It’s a lot more feasible to predict expected cashflows over a shorter-term period. The three-year period is a lot easier to predict whether a company is going to default or not, so the managers will almost never buy them when they are first issued.”

Turning to the Pimco fund, Dobrescu said that the product is more focused on the BB- to B-rated bond segment, which account for at least 70% of the portfolio.

It also makes use of the ICE BofAML BB-B Developed Market Index as its benchmark, which compares to the Axa’s benchmark index, the Ice BofAML Global High Yield Index.

Portfolio exposure (%)

Source: Morningstar

“The managers of the Pimco fund are really not comfortable investing in bonds rated below B, so CCCs have rarely been more than 5% of the portfolio’s assets.”

She added that the fund’s low exposure to CCC bonds is also lower when compared to peer funds.

The Pimco fund also has significantly more bond holdings (650) than the Axa fund (381), Dobrescu added.

“It’s partly because the Pimco fund has a much larger AUM, so they want to maintain a very liquid portfolio. They need to make sure it is very well-diversified,” she said.

123456