AXA Carbon Transition Global Short Duration Bond Fund

Sustainable, Responsible &/or ESG Policy:

AXA IM’s approach to responsible investment is a hybrid between top-down policies and practices and that of specific strategies which have specific E, S or G targets as part of their overall investment objective. 

AXA IM's conviction is that responsibility is a key driver of value-creation, and the Management Board has therefore decided to progressively integrate ESG analysis across all asset classes. The main objectives of our RI strategy set by AXA IM’s Management Board are to integrate, embed and monitor ESG criteria across the different investment teams and to develop specific innovative and pragmatic ESG and ACT investing funds, RI solutions and RI advisory services for clients. AXA IM has invested significant resources into recruiting RI Professionals who work within our investment teams to integrate ESG issues into our investment work. Leveraging its two decades of RI experience, AXA IM is integrating ESG analysis into all its investment platforms, providing fund managers with access to ESG scores and key performance indicators (KPIs) in their front office tools, as well as additional data and research.

The fund invests in accordance with the AXA IM sectorial policies and ESG Standards:

This fund applies AXA IM RI sectoral policies to address ESG tail-risks, which include:

• Exclusion of controversial weapons,
• Exclusion of climate risks (i.e. food commodities)
• Exclusion of deforestation and ecosystem degradation
• Exclusion of soft commodity derivatives

In addition, we also apply the AXA IM ESG standards which are focused on:

• Tobacco - to avoid financing the tobacco industry and thus contribute to protecting public health;
• Defense - to avoid financing companies producing or distributing incendiary weapons with white phosphorus;
• UNGC principles - to avoid financing companies in violation of the United Nations Global Compact;
• ESG quality - to carefully monitor companies with the worst ESG practices;
• Countries with severe human right violations.

The AXA IM sector specific investment guidelines and the AXA IM ESG Standards policy are subject to change and the latest copies are available from the Manager on request.

In 2023, AXA IM reinforced its stance with the following:

• Strengthening of our coal policy and reinforcing of our stance with new exclusions related to unconventional oil and gas,
• Reinforcing our RI fund offering with ESG-focused ETF (Euro Credit PAB, Biodiversity Equity & Climate Equity).
• Strengthening of our ESG standards policy by excluding all companies involved in the production of tobacco.

Process:

Our global investment process is designed to deliver steady, incremental excess returns from active top-down allocation blended with robust bottom-up issuer selection, where top-down views drive our investment performance. Strategic decisions with respect to the overall sensitivity of the portfolio to movements in yields, the shape of the yield curve and our overall attitude to credit risk are generally derived from top-down views. Sector allocation is also generated from top-down views. The bottom-up fundamental value strategy determines investments in specific corporate bonds. We do not carry out directional positions within credit except at the overall allocation level.

It is a five-step process, from market and issuer analysis to portfolio construction, strict risk monitoring and ongoing strategic review. At every stage it is supported by three pillars:

• Portfolio Manager Analysts (PMAs) who in the credit teams have dual responsibility as portfolio managers and as analysts covering specifically allocated corporate sectors; and in the rates team have responsibility for covering specific countries
• Dedicated portfolio engineers who assist the portfolio manager in optimising the diverse risks taken in pursuit of consistent and stable returns. They quantify the risks associated with each proposed active strategy prior to implementation and calibrate them to optimise the risk budget (tracking error for benchmarked funds) and sector allocation
• Deep credit and macro research resources

Forecasting (Step One and Two) takes place on a quarterly basis, whereas Steps Three to Five take place on a continuous basis.

Step One: defining the macroeconomic environment

In the first step of our process, AXA IM’s macroeconomists present the Fixed Income team with their outlook. We also invite external speakers from investment banks, rating agencies, etc. to give us their macroeconomic or specialised views. This information is combined with insights from our portfolio managers, internal macro indicators and country scores. Together these various top-down inputs form the macroeconomic framework which is defined and formalised by the Fixed Income CIO prior to Step Two commencing.

Step Two: defining market expectations and active strategy recommendations using MVST analysis

All fixed income portfolio managers contribute to defining the overall market expectations and active strategies by participating in specialised “Alpha Groups” – small sub-teams of individuals split by expertise. They start with the formal outlook set in Step One and move on to a more detailed analysis of the Macro, Valuation, Sentiment and Technical indicators (MVST) of their specific area of expertise.

The second step of the Forecasting culminates with an internal Investment Committee, which includes all the Alpha Groups Heads and AXA IM Core Investments’ CIO, to ensure consistency across all strategies. All the Alpha Groups reconvene in order to share (and debate) their MVST conclusions with the Investment Committee, led by the CIO. The amalgamation of their views forms the top-down strategy that will determine the direction and shape of the portfolios for the next three months.

Each Alpha Group is then tasked with interpreting this global view and applying it through active strategies in the most appropriate way possible within their portfolios.

Step Three: investment strategy and portfolio construction

Once the active strategies have been selected, the portfolio engineers of the Fixed Income Investment Analytics team work alongside portfolio managers to determine how to most efficiently use their risk (taking into account the performance and decarbonization objectives, internal and regulatory guidelines, as well as responsible investment criteria), and to apply the relevant active strategies to their individuals portfolios.

They use a proprietary optimisation system (“FI Optimiser”) in order to determine the theoretical optimal asset allocation for an unconstrained global fixed income portfolio (i.e. applicable to the proposed strategy). This theoretical output provides a starting point on how best to implement the current active views and strategies within a given portfolio. The output of this optimisation exercise is based on spread and volatility forecasts per fixed income asset class. Portfolio construction for the portfolio then follows three steps: asset class allocation, local allocation, and bottom-up issuer selection. Portfolio managers bear the ultimate responsibility for portfolio construction and security selection.

• Asset class allocation is based on the quantitative output from our proprietary FI Optimiser tool, complemented by a qualitative roadmap comprised of the MVST assessment for each of the different Alpha Groups.

The proposed strategy takes an unconstrained, total return approach to investing and is not benchmark driven for the purposes of portfolio construction.

We carefully ladder the cashflows of the portfolio so that on average 20% of the bonds mature each year. This gives us the ability to naturally re-balance the asset allocation without the need to sell bonds, thus minimising transaction costs. To further enhance our ability to naturally re-balance, we build portfolios managed in this strategy in such a way as to ensure that all asset classes mature gradually over the years. Finally, riskier asset classes (high yield and emerging markets) are, on average, even shorter dated to further limit volatility and default risk.

• Local allocation: within each fixed income asset class, we then determine which local themes we want to implement. These themes are formulated within each local Alpha Group.

• Issuer selection: finally, issuer selection is carried out on a bottom-up basis using a blend of fundamentals, relative value and net zero alignment to identify securities which we believe have the most attractive relative value as well as the highest positive environmental impact, as described in more details in the Research section.

We look globally for the best opportunities across asset classes and within each sector, aiming to exploit cross-currency anomalies wherever possible, buying a given issuer in its cheapest currency (taking into account hedging costs).

As our intention is to hold to maturity wherever possible, and capital preservation is paramount, we look for corporate issuers with sound fundamentals, predictable future cashflows and commitment towards decarbonization. We would not lend money to any issuer judged as being at risk of default or severe deterioration by our Fundamental Credit Research team (please refer to the Research section for a detailed description of their process).

ESG and climate criteria are an integral part of this fundamental assessment and portfolio construction. Credit analysts and portfolio managers use both a quantitative and qualitative basis, helping portfolio managers assess how companies mitigate climate and broader risks and take advantage of these to improve their competitive position in their own sectors. We believe fundamental ESG-risk analysis is vital in the management of downside risk and is key in the avoidance of defaults.

Each issuer within the portfolio is categorised into those than are aligned or aligning to Net Zero, those that are providing climate solutions, such as green bonds or green projects, those that are not-aligned and those with no suitable data. These classifications are based on a range of metrics including our own fundamental credit research analysis, the Science-Based Targets initiative, the Transition Pathway Initiative and Sustainable Development goals, among others. The strategy aims to gradually increase their allocation to Aligned and Aligning issuers and climate solutions over time to help decarbonise both the portfolio and wider industry in line with Net Zero. At present, we do not set specific targets for the allocations between these buckets as data available and methodologies used are relatively nascent and can be subject to change, and data coverage, particularly for smaller issuers is improving.

In terms of instruments we would not invest in hybrid debt, nor in the deeply subordinated segment of our investible universe, as predictability of cashflows and the avoidance of extension risk are paramount to the strategy’s philosophy. The lowest we go in terms of subordination in banks and insurance companies is Tier 2 (bullet, or with a maximum extension of five years after the first call date).

Ultimately, issuer selection comes down to striking the right balance between fundamentals and price to find the best risk-adjusted value. In this task the role of the Credit PMAs, as described in detail in the Research section, is essential.

Step Four: risk monitoring

After the implementation of the appropriate active strategies within portfolios, both portfolio managers and portfolio engineers actively monitor investment risk. They use both proprietary and third-party systems in order to monitor each strategy in terms of its risk contribution (e.g. volatility, tracking error) to the overall portfolio. Weekly risk meetings are an opportunity for portfolio engineers to review the consistency of the portfolio exposure to various risk factors and monitor the various risk metrics alongside portfolio managers.

Step Five: continuous strategy review

Portfolio managers interact on a regular basis through investment committees, team meetings and formal weekly Alpha Group calls, as well as on an ad-hoc basis with analysts and portfolio engineers, allowing the best ideas to flow from the research process into the security selection process. Key to this step is ensuring that the strategies implemented are still current and are yielding results. When necessary, new tactical positions and portfolio rebalancing takes place. Continuous MVST factor analysis and performance reviews guarantee the best results in our portfolios.

Measuring success

On an absolute basis, the strategy aims to offer investors a better return than cash through dynamic asset allocation across the fixed income spectrum, and we would expect this to be achieved under most market conditions.

Versus the broad global all-maturities market, we believe the strategy will perform best in an environment of rising government bond yields. This is due not only to the strategy’s short duration stance (around two years), but also because of its maturity profile, with on average 20% of the portfolio maturing each year. This allows the portfolio manager to naturally reinvest the proceeds of maturing bonds at higher government bond yields, enabling us to benefit from rising yields with very limited capital losses. We will also perform better than the overall market in an environment where credit “sells-off” and credit spreads widen, or during periods of higher volatility, due to our short credit spread duration stance and our focus on protecting against downside risk through broad diversification.

Conversely, the nature of the strategy means it will generally lag the overall all-maturities market in a “rallying” environment, where yields are collapsing and credit spreads are tightening aggressively. Should the market environment become detrimental, the portfolio manager can change the asset allocation to try to capture as much of the upside as possible, while minimising underperformance.

Additionally, we have included in our monthly standard ESG reporting a climate report to track our progress towards Net Zero. This report includes the climate colour exposure (as per AXA IM Net Zero Framework), the carbon intensity evolution and the science-based target split of the fund and the short-dated global corporate bond index, as well as the fund’s top 5 contributors to carbon intensity.

Engagement

Engagement is a key proactive tool to monitor credit quality and mitigate ESG risks within our portfolios as we aim to influence the way companies consider these risks in their business model. We believe engagement should be undertaken at all levels of the business and our Responsible Investment team leads the official engagement initiatives on behalf of AXA IM, balancing the size of AXA IM global investments and the areas where we can be the most impactful when targeting companies.

Climate change has been at the heart of our activities: we engage proactively with issuers when we see fit on climate topics, and see engagement as an additional tool to mitigate ESG risks within our portfolios as we aim to influence the way companies take into account these risks in their business model. We engage both individually with companies and through collaborative actions or initiatives, such as Climate Action 100+.

In addition to engaging directly with companies, AXA IM engages with local regulators and industry initiatives to shape pragmatic and sustainable policies. Our Responsible Investment Quantitative team also liaises directly with data providers to communicate what data AXA IM and our clients require and what additional information the providers should be releasing. 

Engagement progress tracking

Engagement is about lasting change and we acknowledge changing cultural behaviour rarely happens overnight. Some companies might be more willing to listen to us than others and in most cases it may need several interactions before reaching any concrete progress.

We have developed a proprietary system for tracking engagement progress, with a range of possible outcomes ranking from a zero-to-five scale. While some companies will respond sooner than others, we usually allow companies up to 36 months since engagement inception before closing an engagement chapter.

If the engagement process stalls during our interactions we escalate the issue through a variety of methods such as talking to senior management or at severe cases, divestment.

Our engagement programme is accompanied by clear milestones, deliverables and reporting. An engagement report is uploaded and made visible to all AXA IM investment platforms each and every time an engagement interaction is logged. 

These engagement reports provide a concise yet exhaustive summary of the discussion. They contain the most material information around the engagement objectives and progresses (including the zero-to-five status); as well as key points to consider and monitor.

Disclaimer: The investment process described above is provided for illustrative purposes only, and no assurance can be given that it will be applied any given time. Please note that the investment process is subject to change without prior notice and cannot be considered as a reliable indicator of the ability of AXA IM to manage and mitigate risks, nor can be relied as a guide to future performance.

Dialshifter

This fund is helping to ‘shift the dial from brown to green’ by…

The fund invests in companies making measurable, positive contributions to achieving environmental and social UN SDGs, through the three themes of social progress, energy transition and biodiversity. Companies are selected based on AXA IM’s rigorous proprietary impact framework in order to ensure that their products and services are aligned with the fund’s responsible philosophy and, as such, support investment for the greater good.

The fund’s objective to be have a weighted average carbon intensity not only less than the benchmark but reducing year on year in a decarbonization pathway. This approach makes a measurable contribution to the carbon transition theme.

Furthermore, there is ongoing engagement with regards to investment companies transition pathway and targets, to advance market progress towards net zero.

Our organisation is helping to support the Paris Climate Agreement and the Race to Net Zero by…

The road to net zero is challenging to navigate and requires a collective effort. We want to be one of the leaders on this journey: in our investment choices, the products we offer, the way we engage and vote, and manage our business.

This includes our commitment to manage 65% of our total 2022 AUM in line with net zero by 2050 and to aim to exit all coal investments in OECD countries by 2030. Furthermore, we use of a carbon transition framework to track the progress of companies towards net zero targets, helping us to engage accordingly.

SDR Labelling:

Sustainability Improvers label

SDR Literature:

• Consumer Facing Disclosure link