Buy and maintain vs. other strategies

As the number of strategies claiming to deliver cost-effective access to fixed income markets increase, it is important investors can make an informed choice between the different options available.

Watch Lionel Pernias, Head of Buy and Maintain London at AXA Investment Managers discuss this below:
 

Watch the full structured CPD interview: ‘Introduction to Buy and Maintain Credit strategies’ here.

Learning outcomes:

  1. The potential benefits of buy and maintain credit strategies
  2. How a buy and maintain strategy works
  3. Why use buy and maintain strategies today

1.  Buy and maintain vs. buy and hold

Buy and hold strategies are  portfolios constructed with the intention of holding every bond to maturity. Consequently, the investor faces greater  credit risk from holding a potential defaulting security.

Our buy and maintain strategies involve monitoring and managing each holding with the intention of avoiding potential losses.  We do this through pragmatic portfolio construction and risk monitoring processes.

We use natural cash flows from maturities and coupon payments to reinvest in the market, aiming to maximise pricing opportunities in the market. We also use cross-currency relative analysis to pick the cheapest bonds on the curve, without adding maturity risk.

2.  Buy and maintain vs. passive strategies

A typical passive fund is tied to an index, which usually rebalances at the end of each month and is managed according to a ‘rules-based’ approach.

Unlike passive funds, buy and maintain strategies are not ‘rules-based’.

For example, passive funds are forced to automatically sell a bond when it is downgraded,  irrespective of price. So, not only are these passive strategies forced to sell bonds that may never default, they are also forced to sell at a time when market makers are expecting it and have adjusted their prices accordingly. Passive funds are also forced to sell when a bond reaches one year to maturity, missing out on any ‘pull to par’ performance.

At AXA IM, we do not automatically sell on downgrade if we believe that credit quality is sound (thanks to our extensive research capabilities), nor when a bond is approaching maturity. This leads to lower turnover, minimising performance leakage from excessive trading.

3.  Buy and maintain vs. Exchange Traded Funds (ETFs)

The size and scale required to maintain appropriate liquidity levels essential to ETF strategies means that they tend to gravitate towards the largest, most liquid issuers in the universe. In this respect, ETFs can end up mirroring market-cap indices.

Market-cap index exposure tends to be concentrated in the most indebted sections of the market. For example, the top 10 issuers in the ICE Bank of America Global Corporate Bond index make up 25% of the total index. Concentrating exposure in a few large names, leaves investors exposed to systemic risk and investment ‘bubbles’.

Buy and maintain strategies use a top-down allocation framework which aims to mitigate risk by avoiding the biases of the index (e.g. exposure to sector ‘bubbles’). This is complemented with thorough bottom-up research which helps avoid the most stressed or overvalued parts of the market, which is something a passive fund can’t do.

Buy and maintain strategies aim to address investors’ growing frustrations with both the high cost of active credit management and the inefficiencies of passive index-tracking. The strategy sits in the middle of these two approaches and combines the best of both: the skill and added-value of an active credit process, and the low-cost edge of passive management.