Unconstrained Fixed Income

Invest for total return

What is Unconstrained Fixed Income

Traditional fixed income investing is often benchmark-oriented. This means the aim is to add value over a chosen index, regardless of if the index is moving up or down. These types of portfolios are usually built with reference to that index and can be constrained to a particular area of the fixed income universe such as a region, sector, maturity or credit quality.

An unconstrained – or ‘go anywhere’ - approach is benchmark-agnostic with portfolio construction generally based on growing income and capital without reference to an index. This provides the potential flexibility to capitalise on opportunities across the fixed income spectrum as and when they arise.

The focus is usually on aiming for risk-adjusted returns. In other words, trying to achieve a potential return for a given level of risk. It may therefore form a core bond portfolio for investors seeking moderate capital growth and income.

Why Consider Total Return Investing?

There are two components of the total return from a fixed income portfolio: yield – or income return from coupons – and capital growth of the assets over time. 

Holistic approach

Some bond investors focus only on the income element but in recent years historically low government bond yields are making it harder for traditional fixed income strategies to generate adequate income from lower-risk investments. Simply chasing higher yields may cause investors to ignore increasing risk in the portfolio.

Total return investing is a more holistic approach that considers both income return and capital return, rather than an individual component. Income received by the portfolio can be reinvested back into the underlying assets with the aim of maximising total return.

Unconstrained total return

An unconstrained approach can lend itself well to generating potentially attractive total return. With the focus on flexibility and diversification, unconstrained fixed income investing aims to seek out opportunities for both income and growth across a broad range of fixed income securities while balancing the risks of different assets. 

Fixed income comprises a variety of sub-asset classes. Different bonds potentially have different performance and risk drivers. Performance of each sub-asset class is correlated to a different part of the economic cycle. The economic cycle is in constant motion so a portfolio needs to be able to adapt.

An active, unconstrained approach to fixed income investing can have the flexibility to use dynamic asset allocation and effective diversification to try and capture different performance drivers at the right time, while managing the associated risks.

Our Total Return Fixed Income Strategy

AXA IM’s global strategic bond strategy is an active total return strategy that aims to take advantage of market opportunities and focus on downside preservation to deliver attractive risk-adjusted returns throughout the economic cycle.

As an unconstrained, flexible strategy it can allocate across the global fixed income universe (government bonds, inflation linked, investment grade credit, high yield and emerging market debt) and seeks to respond to different stages of the market cycle and allocate accordingly.

The investment process is based on our proprietary framework which breaks down the global fixed income universe in a simple and transparent way, according to risk factor sensitivity. The portfolio allocates across three risk buckets – defensive, intermediate and aggressive – allowing the Manager to adjust the allocation depending on the market environment, to help mitigate risk.

Fixed income risks

Comparing fixed income versus equities still tends to show the former as a lower risk option overall. However, fixed income seek to provide opportunities across the risk/reward spectrum to position portfolios for different environments and generate varying levels of income and potential return.

Interest rate risk

Bond prices usually move in the opposite direction to interest rates, so when rates are rising, bond prices may fall, and vice-versa. This is because bonds are riskier than cash, so investors need the incentive of higher rewards to use cash to buy bonds. When interest rates are low, demand for bonds is higher which pushes up prices – and vice-versa.

Credit risk

There is a risk that the issuer of the bond will default on its debt by failing to pay investors what it owes them. This risk varies with the credit-worthiness of the issuer and is reflected in their credit rating. Investors who take more risk by investing in lower rated issuers have the potential to achieve higher reward, and vice-versa. Issuers with a higher credit rating are considered ‘investment grade’ while those with a lower credit rating are considered ‘high yield’.

Liquidity risk

Liquidity risk is a measure of how quickly an investor could turn an asset into cash, if they needed to. In market environments where liquidity is low there is a risk that if a bond holder wanted to sell the bond, they may have difficulty finding a buyer, especially at a good price. 

Inflation risk

Inflation – the rate at which the prices of goods and services increases – can be a risk if the level of inflation is higher than the level of income made on savings and investments. The income paid by bonds is fixed so when inflation is rising, that level of income may be less appealing and bond prices tend to fall - and vice-versa.