AXA IM offers credible alternative to active corporate bond fund management
14 November 2012
By Toby Garrod
AXA Investment Managers has developed a fixed-income solution that offers a middle way between active corporate bond fund strategies (and their value concerns) and passive index strategies based on market cap weightings (and their implicit inefficiencies). The emergence of the firm’s ‘SmartBeta’ strategies is particularly timely, given the already dominant position of the corporate bond market as the asset class of choice for fund managers across the globe.
While the performance problems associated with active investing have long been acknowledged, the recognition of issues in regard to market cap strategies, particularly in regard to the corporate bond markets, has been a more recent phenomenon.
“Before 2008, the rising tide was floating all the boats, so investors weren’t particularly focused on managing their risks in the corporate bond space; but now these ideas make a lot of sense,” the company’s head of institutional client strategy Tim Gardener tells Asia Asset Management.
The market cap-weighted strategy in the credit market invests the highest proportion of its assets with borrowers or sectors that have the most public debt outstanding, he notes in his white paper ‘Investing in Credit: Smart Beta or Dumb Beta?’ As research on the topic suggests, this perversely ‘rewards’ issuers that take on greater amounts of debt and subjects the investor’s portfolio to an unduly high amount of credit risk.
“It is extremely difficult to argue that this is a sensible low risk way of lending money,” says Mr. Gardener. “One of the key features people need to be aware of in the credit market is the asymmetry of returns. Making the right bond selection doesn’t give you much, but getting it wrong can mean you lose everything – unlike the equity market, which is a lot more balanced.”
The response to the firm’s recent SmartBeta fund launches suggests the strategy is fast gaining recognition.
“In the short period since we have launched the strategy, we have a pipeline that’s in the billions, which can be good for fund management. It has been rated by consultants and we’ve got some real money into it. I think it’s that combination of corporate bonds being a favoured asset class and it being cheap. It’s not as cheap as an index fund, but it’s a lot cheaper than an active manager.”
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