HEAD-TO-HEAD: Axa vs Pimco

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The main difference between the two funds is in how close they stay to their benchmarks, which for the Axa fund is the euro-hedged Bloomberg Barclays World Inflation-Linked Bond Index and for the Pimco fund is the US dollar-hedged Bloomberg Barclays World Government Inflation-Linked Bond Index.

“The Axa fund is managed in a benchmark-aware fashion,” Dobrescu said. “That’s in line with the way they manage their whole fixed income range.”

The fund managers have a conservative limit of 1.5 percentage points on allowable tracking error, a 25% allowable deviation in the average duration of the portfolio with respect to the benchmark, and a 10% limit on deviation in country exposure.

“That’s something that limits the activeness of their approach,” Dobrescu noted. Even though the fund prospectus allows the fund to invest up to one-third of its assets in nominal bonds, in practice the fund’s managers do not use this ability frequently or to a large extent.

“The managers want to keep [the fund] a plain-vanilla, core offering that’s predictable and is going to do more or less what the benchmark does,” she said.

The Pimco fund is much more adventurous. The fund’s prospectus also allows up to one-third of the assets outside the benchmark and the management team tends to use this leeway to the full extent. They also go beyond nominal government bonds, adding to their portfolio corporate issues, asset-backed securities, emerging market debt and derivatives.

While the Axa fund “may occasionally use some bond futures to tweak the duration, for the Pimco fund [derivatives] are a major drive of the strategy,” Dobrescu said. Pimco uses derivatives in what it calls a “bond-plus technique”, to obtain desired exposures through derivatives, while the cash collateral that’s freed up this way is invested in short-term bonds for extra yield. Dobrescu noted that this approach was used across all Pimco funds.

Both funds invest a high portion of their assets in US Treasury Inflation-Protected Securities (TIPS). The US exposure accounts for 51.4% of the Axa fund and 58% of the Pimco fund. The Axa fund has 25.5% of assets in UK bonds and Pimco 31.1%.

Securitised bonds, which include mortgage-backed and asset-backed securities, account for 8.3% of the Pimco fund, while Axa does not use them.

Axa’s portfolio has a higher proportion of AA-rated bonds, 67%, compared to Pimco’s 34%. Pimco has 51% of assets in AAA-rated bonds, some of which are asset-backed securities.

Pimco’s use of derivatives results in a high number of holdings in the portfolio, around 430, and a high turnover ratio. The Axa fund held 111 positions in June 2017.

The Pimco fund also has the ability to make currency bets through its small currency overlay, Dobrescu noted, and has been using it recently to bet on the US dollar and against Asian currencies. The Axa fund does not take active currency bets.

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