Fixed Income

Global Strategic Bonds vs. Global Short Duration

  • 27 January 2021
  • 3 min read

We have had questions from advisers in recent months about the difference between two of our active global unconstrained bond strategies – the Global Strategic Bond strategy and the Global Short Duration strategy. In this piece, we aim to outline the difference between each of the strategies and why an investor might want to consider either of them.

Global Short Duration: a fixed approach to duration

The key difference between the two strategies is their approach to duration. Global Short Duration has a more fixed approach, investing only in the short-dated bonds with a maturity of up to five years. It will be less affected by rising interest rates, making it suited to investors who potentially want cash-plus returns but who are worried about the potential for tighter central bank policy.

As of the end of December 2020, around 20% of Global Short Duration was invested in bonds with a maturity of less than a year, 47% with a maturity of between one and three years, and 33% with a maturity of 3-5 years.1

Global Short Duration invests across the short duration spectrum, including sovereign bonds (nominal and inflation-linked), investment grade, high yield and hard currency emerging markets. It therefore involves taking higher default risk than investing in a typical government bond fund.

Global Strategic Bonds: a flexible approach

In contrast, Global Strategic Bonds strategy has a flexible approach to duration, capable of adopting a short, medium or long duration stance depending on the economic cycle. It has a duration leeway of between 0-8 years with the manager taking a high conviction approach to duration. As of the end of December, for example, the manager had a position in long-term French debt, something which would not be held in our Global Short Duration strategy. By tactically adjusting the fund’s duration exposure, the manager aims to add to total returns over time.

In essence, Global Strategic Bonds can take active investment decisions to protect the portfolio from rising interest rates, but it is not structurally designed to protect investors from rising rates.

Conclusion

Cautious investors who want additional returns with minimal exposure to the risk of rising interest rates may want to consider Global Short Duration. The strategy benefits from global diversification and dynamic asset allocation across the full short-dated fixed income spectrum. As such, it does involve taking some credit risk but offers the potential for a higher yield than that available on government bonds or cash in the bank. In this respect, it can offer a good ‘first step’ out of cash and into the world of investing.

Investors who want access to the potential returns associated with the whole of the fixed income universe should consider Global Strategic Bonds. The strategy’s ‘go anywhere’ approach makes it more suitable as a core fixed income holding, offering the flexibility to capitalise on the best return-seeking opportunities available. While Global Strategic Bonds is still conservatively run, its flexible duration approach does mean investors may be taking an additional level of duration risk compared to our Global Short Duration strategy.

  • Source: AXA IM as at 31/12/2020.

Additional Risks – Global Short Duration

Counterparty Risk: failure by any counterparty to a transaction (e.g. derivatives) with the Fund to meet its obligations may adversely affect the value of the Fund. The Fund may receive assets from the counterparty to protect against any such adverse effect but there is a risk that the value of such assets at the time of the failure would be insufficient to cover the loss to the Fund.

Derivatives: derivatives can be more volatile than the underlying asset and may result in greater fluctuations to the Fund's value. In the case of derivatives not traded on an exchange they may be subject to additional counterparty and liquidity risk.

Geopolitical Risk: investments issued or traded on markets in different countries may involve the application of different standards and rules (including local tax policies and restrictions on investments and movement of currency), which may be subject to change. The Fund's value may therefore be impacted by those standards/rules (and any changes to them) as well as the political and economic circumstances of the country/region in which the Fund is invested.

Interest Rate Risk: fluctuations in interest rates will change the value of bonds, impacting the value of the Fund. Generally, when interest rates rise, the value of the bonds fall and vice versa. The valuation of bonds will also change according to market perceptions of future movements in interest rates.

Emerging Market Risks: emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. As a result, investments in such countries may cause greater fluctuations in the Fund's value than investments in more developed countries.

Liquidity Risk: some investments may trade infrequently and in small volumes. As a result the Fund manager may not be able to sell at a preferred time or volume or at a price close to the last quoted valuation. The Fund manager may be forced to sell a number of such investments as a result of a large redemption of shares in the Fund. Depending on market conditions, this could lead to a significant drop in the Fund's value and in extreme circumstances lead the Fund to be unable to meet its redemptions.

Credit Risk: the risk that an issuer of bonds will default on its obligations to pay income or repay capital, resulting in a decrease in Fund value. The value of a bond (and, subsequently, the Fund) is also affected by changes in market perceptions of the risk of future default. The risk of default for high yield bonds may be greater.

Further explanation of the risks associated with an investment in this Fund can be found in the prospectus.

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