AXA IM: Why now for US Short Duration High Yield Bonds?

Navigating today’s market
 

The inflationary pressures and a hawkish Fed have led to an increased probability of an US recession. With markets focused on the trajectory of interest rates and the impact of a US recession, short duration securities should be well-placed to help investors mitigate against this volatility.

By focusing on better-quality non-investment grade while diversifying the positions held and limiting duration risk, we believe our Short Duration High Yield strategy remains well positioned in this environment. The natural turnover of the strategy results in a high generation of cash, which allows us to constantly be reinvesting. During periods of rising rates, these reinvestments are into the new, higher yielding market. This, along with our duration management aims to insulate and dampen volatility within a rising rate environment.

Due to the substantial sell-off year-to-date, yields are among the highest we’ve seen since 2009, resulting in valuations that are very attractive and represent a buying opportunity. Looking forward, the default rate will likely increase from today’s exceptionally low level, especially if we are heading into a recessionary environment. However, we believe that the default rate within the US high yield bond market will not rise to levels that have been experienced ahead of previous recession. To the extent that default activity increases, we will continue to rely on our discipline credit process to avoid the defaults that do occur in the market.
 

Benefits of AXA IM’s US Short Duration High Yield strategy

1. Stable, consistent income
   The strategy was created with the target to minimize volatility while generating stable, consistent income within the US high yield market.  Our short duration focus and discipline have allowed us to generate an attractive risk-return profile by compounding current income while avoiding principal losses. 
    
2. History of avoiding defaults
   Our Short Duration High Yield strategy has always prioritised principal preservation and been managed with a strict credit discipline.  Any change in either our assessment of a security’s potential or in the credit research outlook will prompt a reassessment of the position.  Since inception of the strategy in 2001, this conservative approach has resulted in only 2 defaults (2009 and 2011).[1]
    
3. Liquidity
   Short duration securities make up the most liquid portion of the high yield market and are highly liquid, even in challenging markets. Our capacity and scale have allowed us to successfully manage through multiple bouts of market volatility.
    

4. Attractive valuations
   While off its peak of earlier this year, the average weighted yield-to-worst in the strategy is 7.20%[2], and still offers an attractive entry point. The strategy’s volatility since inception is 4.01% compared to the index of 9.27%,[3] so investors with a lower appetite for volatility could find a short-duration approach to high yield a very compelling proposition.

5. Defensive with a focus on quality

   Our strategy has always been positioned as an up-in-quality, defensive portfolio versus the broad US high yield market and the benefit of our lower-risk positioning has clearly been evident during this recent period of volatility.

   Our strategy’s long-term relative resilience during periods of volatility demonstrates the defensive qualities of our short-duration approach, as can be seen by the overall strategy’s modified duration-to-worst is 2.8, while the market duration is 4.5.[4]
    

6. Diversification

   The strategy remains well diversified and has 184 positions across 135 issuers in 16 of the 18 US high yield sectors[5]. This diversification along with our Short Duration High Yield strategy’s bias for higher quality credits helps to mitigate against credit risk.

    

^{[1] Sources: AXA IM US SDHY Representative Portfolio stream (data prior to March 2004 is based on legacy portfolios managed in the same investment strategy) as at 1/08/2022. The representative accounts shown have been selected because they utilize an investment setup that is typical for accounts in the relevant strategy and/or on the basis that they had adequate assets under management to effectuate a fair comparison.}

^{[2] Source: AXA IM US, Factset as at 23/08/2022 AXA IM US SDHY Representative portfolio exclusive of cash. . The representative account shown has been selected because it utilizes an investment setup that is typical for accounts in the relevant strategy and/or on the basis that it has adequate assets under management to effectuate a fair comparison.}

^{[3] Sources: AXA Investment Managers. ICE BofA ML US High Yield index is shown for illustrative purposes only. All data is from composite inception date of September 30, 2001 through July 31, 2022. Past performance is not indicative of future results}

^{[4] Source: AXA IM US, FactSet as at 31/07/2022. AXA IM US SDHY Representative portfolio exclusive of cash. ICE BofA Merrill Lynch US High Yield Index is shown for illustrative purposes only. The representative account shown has been selected because it utilizes an investment setup that is typical for accounts in the relevant strategy and/or on the basis that it has adequate assets under management to effectuate a fair comparison.}

^{[5] Source: AXA IM US, Factset as at 23/08/2022 AXA IM US SDHY Representative portfolio exclusive of cash. . The representative account shown has been selected because it utilizes an investment setup that is typical for accounts in the relevant strategy and/or on the basis that it has adequate assets under management to effectuate a fair comparison}

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