30 July 2020
By Eduardo Sanchez, Senior Investment Research Analyst Square Mile
Given the ongoing global uncertainty, it is worth highlighting a defensive strategy that is widely held within the Square Mile portfolios, the AXA Sterling Credit Short Duration fund.
This fund is well suited to investors who are willing to tolerate some level of volatility but are looking for higher levels of income than cash. It is a very defensive strategy with a low volatility profile and has one of the lowest drawdowns among its peer group within the IA Sterling Credit sector. For example, during the recent market sell-off in March, its drawdown was relatively low at less than 4% against a sector average of close to 9%. The fund is well diversified with over 100 issuers represented in its portfolio and it provides a natural level of liquidity since 20% of its holdings mature each year. It has a focus on investing in securities with maturities of less than five years which reduces the transaction costs while minimalising interest rate risk.
It is also important to note that since the sterling yield curve currently is very flat, the shorter duration part of the curve offers a very attractive yield relative to longer duration. This fund provides a yield of 1.7% with a duration of only 1.8 years. Securities with older maturities are yielding slightly higher, at around 2%, but with that the duration is in excess of eight years which introduces much greater interest rate risk. In our view, these characteristics make the fund very attractive and a very good fit for our managers’ investment philosophy.
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