Defend your portfolio and get an income with AXA Sterling Credit Short Duration Bond

Bond markets can be complex and vulnerable, and have become too closely correlated with equities. And although cash is very safe, it yields little. However, if you are able to move up the risk curve from cash, short-duration corporate bonds are lower risk than many other areas of the fixed-interest market. These yield more than cash, but because they are short-duration, are much less volatile and cary less risk than other types of corporate bonds. Well-managed short-duration corporate bond funds can also pay an income that outpaces Bank of England base rates.

A good example is AXA Sterling Credit Short Duration Bond Fund (GB00B5VL0B78), which has been run by Nicholas Trindade, a member of the company's large and well-resourced bond team, since 2010. The fund invests in a broad range of short-duration bonds that will reach maturity within five years. These yield less than longer-dated bonds, but have significantly less risk of default and of being outpaced by rising interest rates.

Mr Trindade buys and holds bonds until they mature, which helps to reduce transaction costs so they eat into less of the fund's returns. Each year around 20 per cent of the fund's bond holdings mature, meaning the companies that issued the bonds repay what they borrowed. Mr Trindade then reinvests these proceeds into other bonds with the aim of maintaining as high a yield as possible with minimal trading.

This strategy has meant that over five years the fund has returned 7.86 per cent, ahead of the 2.33 per cent compounded interest you would have got from the Bank of England base interest rate over the same period. And it is only marginally behind the 8.18 per cent rise in consumer price index (CPI) inflation, although matching this is not part of the fund's aims.

AXA Sterling Credit Short Duration Bond is far less volatile than equities, longer-duration corporate bonds and even UK government bonds. The fund has an annualised volatility of 0.91 per cent over the past five years, versus 6.72 per cent for Bloomberg Barclays Sterling Gilts index and 4.96 per cent for iBoxx UK Sterling Corporate All Maturities index. It is more volatile and higher risk than cash, but has a yield of 2.1 per cent. It also has a very low ongoing charge for an active fund of 0.41 per cent.

Mr Trindade tries to balance investing in bonds that have higher credit ratings with ensuring the yield remains as high as possible, but defaults on bonds are always possible. The fund can lose money in the short term, and over one year it is down 0.17 per cent. And you may need to hold it for three years or more for its returns to outpace base interest rates.

However, the fund is well diversified, so even if one bond defaulted it would not have a big effect on the overall returns. It holds more than 200 bonds from 122 issuers, and 30 per cent of its assets by value are in the UK, 39 per cent in Europe and 11 per cent in the US. Non-sterling bonds are hedged back into sterling to avoid currency volatility.

So if you have an investment time horizon of at least three years and can tolerate some volatility, AXA Sterling Credit Short Duration Bond Fund could be a good way to mitigate volatility in your portfolio, and provide you with a good income along the way. Buy. TL

AXA Sterling Credit Short Duration Bond Fund (GB00B5VL0B78)

Source: AXA Investment Managers as at 31/12/2018, *Morningstar as at 23/01/2019

Performance

Source: FE Analytics as at 22/01/2019

Top 10 holdings as at 30/11/2018 (%)

Source: AXA Investment Managers

Geographic breakdown as at 31/12/2018 (%)

Source: AXA Investment Managers