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AXA IM's Hayes slashed duration for shock protection
by Dylan Lobo on Feb 13, 2014 at 14:04
AXA Investment Managers’ Nick Hayes cut duration on his strategic bond fund at the start of the year as his nervousness over a financial shock rose.
The Citywire A-rated manager believes bond markets are in a scenario where risk-on, supported by forward guidance, remains the top trade in the hunt for yield. He struggles to see high yield delivering a total return of much more than 6% this year.
‘The economic environment is seen as gently positive and there has been a huge issuance of investment grade bonds, which is outstripping demand,’ he said an interview with Wealth Manager shortly before the recent correction in martkets.
‘The more this happens, the more concerned I get. Credit spreads are at their tightest level in five years and issuance has become speculative.’
Hayes fears an unpredictable event could cause a market correction where spreads widen and equities fall.
‘This may be earnings disappointments, or a political event in Europe,’ he explained. ‘This could cause people to ask why they are buying high yield, resulting in a repricing of risk and a rally in core government bond yields as people go for safe haven assets.’
Shock not priced in
He does not think bond markets are pricing in the risk of a shock and has positioned his portfolio more defensively. He has cut the fund’s duration from 4.5 years at the end of last year to around 2.75 years.
Hayes has bought short duration BB rated paper on a yield of between 2.5% to 3%, with maturity from six to 18 months. ‘We are as cautious as we can be and acknowledge that yields are low and the potential for attractive gains is not there. The risk reward is not in favour of adding more risk at the moment,’ he said.
‘Bonds with shorter maturity are not going to move in price if we get that shock. My biggest fear is buying risk at the wrong price and lots of people are doing that at the moment, which is why we’re more cautious. If spreads get higher we will look to take advantage.’
At least one fixed income sub-sector has delivered a minimum annualised return of 10% in the past 11 years, with high yield accounting for this return in four of the last five. But Hayes accepts this trend is unlikely to last.
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