Focus on an attractive return for the next 5 years

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The views of Wall Street gurus have changed from "recession" to "soft landing" in just 9 months. We will have to get used to a scenario of inflation above 2% and higher for longer rates. How might investors invest in this context?

The US Federal Reserve (Fed) has almost ended its tightening cycle without causing a recession. This is an outcome that had not been expected at the beginning of the year. As a result, analysts and economists’ forecasts have shifted from a narrative of recession to a "soft landing" narrative.

According to Bloomberg data, consensus estimates of the probability of a recession have fallen from 70% in January 2023 to 55% at the end of September 2023.

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Source: AXA IM, Bloomberg as of 30th September 2023

Even in the eurozone we haven’t seen a recession materialise yet, although the greater exposure to energy prices and the consequences of the war in Ukraine are having a greater impact on the slowdown in growth.

Rates will remain high for a long time

Unlike the United States, where the economy, albeit slowly, continues to grow, Europe is in a phase of cyclical weakness. While US GDP forecasts have improved, those for the Eurozone are lower, with GDP estimated at +0.5%, as shown on the chart below.

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Source: AXA IM, Bloomberg as of 10th October 2023

This phase of weakness could be overcome if the inflation shock is isolated and households see current labour income rising, even at real levels. However, central banks are emphasising a higher for longer rate environment and we cannot rule out that rates will rise further. Alongside this, while inflation has slowed, it remains well above the central banks' 2% target.

Uncertain Outlook: How to invest?

With an outlook on the global economy still uncertain, it is difficult for investors to estimate what kind of return to expect and over what time horizon. We, therefore, think that a Fixed Maturity Product (FMP) could be an option to consider for those seeking more predictability on the potential return of their investments.

FMPs offer an opportunity to invest capital into a portfolio of carefully selected bonds during a subscription period. Most of the bonds are held in the portfolio until the maturity date is reached, at which time the principal is returned. During the life cycle of the Fund, the income generated – the coupon – is reinvested in line with the investment strategy, or distributed to the investor. It is important to note that the value of fixed-maturity products may fluctuate during the investment period due to factors such as changing market conditions, non-repayment of debt by companies or early repayments or the sale of bonds before maturity.

As a result, the value of the capital at the end of the period cannot be guaranteed and may be lower than the initial investment, although the portfolio will be managed with this fixed maturity date in mind.

The euro credit market offers opportunities

Central bank tightening monetary policy has created some volatility in interest rate markets, pushing yields and spreads higher. Today, the European high yield credit market offers attractive valuations and yields close to the highest levels in a decade. This is a potentially favourable starting point for a fixed-maturity high yield product and could provide an excellent opportunity for investors to secure an attractive forward return.¹

In addition, European corporate bonds have held up well despite macroeconomic headwinds and the default rate is expected to remain within historical averages.

How AXA IM Euro Yield Target 2028 works

Our AXA IM Euro Yield Target 2028 Fund, launched on 14 June 2023, seeks to deliver an annualised return net of fees over its life. We aim to achieve this through building a diversified portfolio across euro high yield and investment grade bonds from multiple sectors and countries. 

The fund looks to minimise transaction costs by selecting bonds that can be held for the life of the product, thereby reducing portfolio turnover. 

In the current environment, more and more savers are looking for a reliable alternative to bank deposits. A portfolio of bonds offers diversification of issuer risk and interest rate risk.

Key features

Annualised return target² : 4-6% net of fees over 5 years

Expiry Date: June 30, 2028

Diversified portfolio of bonds issued mostly by European companies with an emphasis on high yield

17 investment professionals covering the high yield market

Subscriptions until November 30, 2023.

Portfolio characteristics and industry breakdowns

When the fund launched in June 2023, the investment team began building a diversified bond portfolio and will continue to invest throughout the subscription period until the final portfolio is complete at the end of this period (30th November 2023).   

Throughout the fund’s life we will continue to monitor and manage the portfolio with the aim of optimising the return and protecting our investors. Should we make a credit decision to sell a bond, we will reinvest those proceeds. In addition, coupon income and principal repayments will be reinvested until the fund’s maturity is near. 

As it is a self-liquidating Fund, at the maturity date all bonds will have been redeemed or sold and the resulting liquidity will be paid to the subscribers.

Below are the characteristics of the portfolio and the sectors in which it is invested.

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Source: AXA IM, as at 30 September 2023.  *The data presented are calculated at the date of publication. There is no guarantee that they can be confirmed at a future date.

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Source: AXA IM, as at 30 September 2023.  The data submitted are calculated at the date of publication. There is no guarantee that they can be confirmed at a future date.

 

Key risks of investing in the AXA IM Euro Yield Target 2028

Counterparty  risk: risk of bankruptcy, insolvency or default of one of the counterparties in the sub-fund to their payment or delivery commitments.

Market risk: Risk of changes in asset value over the life of the sub-fund due to market fluctuations (volatility of asset prices, widening of spreads) in general or in specific markets.

Sustainability risk: In view of the risk profile and investment strategy of the sub-fund, sustainability risks can be expected to have a strong impact on its results.

Operational risk: the risk that certain operational processes, including those related to investment protection, may be ineffective and lead to losses.

Geopolitical risk: Investing in securities issued or listed in different countries may involve the application of different rules and regulations. Investments may be affected by exchange rate fluctuations, changes in legislation or restrictions on investment, as well as changes in exchange control regulations or price volatility.

Liquidity risk: reduced liquidity risk under certain market conditions, which could expose the sub-fund to difficulties with respect to the valuation, purchase or sale of all or part of its assets, with a potential impact on the net asset value.

Credit risk:  the risk that issuers of bonds held by the sub-fund will not meet their redemption obligations or have their credit ratings lowered, resulting in a reduction in their net asset value.

Impact of techniques such as derivatives: Some management strategies involve specific risks, such as liquidity risk, credit risk, counterparty credit risk, legal risks, valuation risk, operational risk and risks associated with the underlying instruments. The use of these strategies may also include the use of leverage, which can increase the effect of market fluctuations on the sub-fund, resulting in a serious risk of losses.