AllianzGI is a leading active asset manager with over 600 investment professionals in over 20 offices worldwide and EUR506 billion in assets under management (as of 31 December 2022).
In this edition of our Q&A Series, we take a deep dive into the Allianz Global Opportunistic Bond, our current top pick for a global bond fund that offers diversification and a focus on capitalising on the best opportunities across fixed income markets. We are pleased to have AllianzGI share their insights on this fund, providing valuable information for investors seeking a well-rounded bond portfolio.
1) How does AllianzGI, as an asset manager, approach fixed income investing?
AllianzGl’s Fixed Income capabilities are organised into a globally integrated framework. Each product stream brings together specialist investment teams from around the business, in a structure designed to maximise collaboration on investment ideas and the sharing of best practices. The Core Fixed Income (FI) pillar contains the Global Markets sub-team, who are responsible for the Fund.
Our CoreFI competitive advantage is driven by a combination of three key ingredients to our success:
- Time-tested investment process, proven to add value
- Proprietary risk modelling tools that provide valuable leading indicator signals
- An experienced and diverse team of global specialists
Part of the success of our investment process is driven by our proprietary leading indicator tools, which distil a vast array of market data into signals that allow us to forecast future monetary policy, inflation and growth dynamics. Our proprietary credit filters have a proven track record of identifying future credit distress in corporate markets.
This combination of careful risk control, experienced judgement and a robust investment process allows us to target attractive return generation whilst minimising drawdown events – A “win by not losing” approach to global bond management.
2) What type of fixed income securities does the fund invest in? Are there any restrictions, either in absolute terms or relative to a benchmark?
The Fund’s strategy is unconstrained, constructed without reference to any industry benchmark, and no home bias. The flexibility of this management approach is an important design feature that may help generate returns across differing market environments. This approach should ensure that the strategy generates returns which are, at times, highly independent of those of the broader bond market.
The responsible Portfolio Management team strives to maximize returns by capturing the best opportunities from across the Global Fixed Income universe. While returns can naturally be expected to fluctuate year-on-year, over time the target risk budget should allow the programme to deliver substantial excess return over the risk-free rate.
3) Given the relatively wide investment universe of the Fund, what does the security selection process look like?
Our approach to investing is based on our healthy entity philosophy, which is: We believe that entities whose financial health is improving relative to others will provide the highest total returns. Entities whose debt/saving dynamics are healthy (relatively low levels of debt and strong balance sheets) or that are recovering from a period of deterioration in their debt profile will outperform those entities whose debt dynamics are poor. Our approach to investing has been applied consistently across the team since inception since 1984.
For the benchmark-agnostic Allianz Global Opportunistic Bond, the starting point is the team’s highest conviction investment ideas. Our extensive research capabilities across sovereign and credit markets are utilized as inputs for the Fund, with a view on capturing the best ideas emanating from across the whole Fixed Income platform’s robust and proven investment process. The Fund’s return profile focuses on a balanced mixed of return drivers:
4) How has the Fund performed since inception, in terms of both growth (total return) and income (distributions)?
i) On an absolute basis:
The Fund aims to deliver a Cash+ return through the cycle. And when we look at the individual calendar years since inception, it’s clear that in the more positive years for fixed income investing, the portfolio management team have been able to capture these positive tailwinds and generate returns well above the cash rate. In the more challenging years for the asset class, the strategy focuses on capital preservation and attempts to minimise drawdown, which is evident in the relatively contained experiences through the COVID shock in 2020 and the credit spread distress at end 2018.
ii) On a relative basis compared to the Fund’s peer group:
We find that viewing performance of the Fund versus its peer group can provide a useful indicator of the performance experience in the context of other flexible bond strategies. The Morningstar Global Flexible Bond peer group has been in place since the Fund’s inception, and we have consistently outperformed this peer group.
The main drivers for the outperformance have been the March 2020 Covid shock, a credit market event, and the market volatility seen throughout 2022, a market rates shock. In both cases, the outperformance of the Fund versus the peer group has extended, and the overall positioning of the Fund, focused on a balanced mix of its return drivers, rather than being too heavily concentrated into one or two risk factors.
Given the correlation of spreads to other risky assets such as equities, a “yield-chasing” approach can sacrifice one of the key traditional advantages of a bond portfolio: to provide a source of de-correlation when risky assets suffer. The Fund aims to deliver a “bond-like” experience for investors, with a focus on the smoothness of the return profile whilst minimising the potential drawdown events that may occur.
5) What are your firm’s views on the fixed income asset class in 2023, and how is that reflected in your portfolio allocations?
Our views have evolved since the bank stresses in March 2023 - the macro backdrop now presents a more constructive outlook for sovereign bonds, especially US Treasuries, for the rest of this year. In addition, we expect G4 yield curves to steepen given our view that G10 central banks (ex-Japan) are getting closer to the end of their hiking cycles and that ultra-long maturity bonds do not provide sufficient term premium in an environment where inflation is still elevated, and debt-to-GDP ratios remain close to all-time highs.
We have a strategically constructive outlook for US duration (i.e. over a 3-6 month horizon), due to several factors: increasing financial stability risks that brings the US Federal Reserve (Fed) closer to the end of its hiking cycle; credit contraction from reduced US bank lending will soon begin to affect economic activity and growth resilience; inflation is peaking, but the speed of decline in core inflation is a big question for markets - however, a re-acceleration in inflation seems unlikely; and the cumulative effects of rate hikes have yet to fully feed through into the real economy - we are seeing a transition from monetary policy tightening to credit tightening.
We think 10-year US Treasury yields are likely to remain in a 3.25-3.75% range in the very near term (but a 3.0-3.5% range over a 3-6 month horizon), with growing conviction that US yield curves steepen as markets increasingly price for a pause in the Fed’s hiking cycle.
Our recent duration buys are expected to be the first of a step-wise addition into increasing portfolio interest rate risk; as well as building into a global basket of curve steepeners.
In credit markets, we continue to favour financial issuers given the benefits associated with the rising rate environment and attractive valuations relative to industrial issuers. Within industrials, we continue to like issuers from the Energy sector and preference for Reverse Yankee issuers in Europe. Additionally, we continue to like the defensive nature of US regulated Utilities. And in Emerging Markets (EM), with high yields on offer and resilient fundamentals, we still believe that EM assets make an attractive total return proposition for 2023, which could benefit from strong investor demand this year as the asset class remains under-owned by international asset allocators.
Find out more on Allianz Global Opportunistic Bond here.
Information herein is based on sources we believe to be accurate and reliable as at the date it was made. We reserve the right to revise any information herein at any time without notice. No offer or solicitation to buy or sell securities and no investment advice or recommendation is made herein. In making investment decisions, investors should not rely solely on this publication but should seek independent professional advice. However, if you choose not to seek professional advice, you should consider the suitability of the product for yourself. Past performance of the fund manager(s) and the fund is not indicative of future performance. Prices of units in the Fund and the income from them, if any, may fall as well as rise and cannot be guaranteed. Distribution payments of the Fund, where applicable, may at the sole discretion of the Manager, be made out of either income and/or net capital gains or capital of the Fund. As a result, it may reduce the Fund’s net asset value. The dividend yields and payouts are not guaranteed and might change depending on the market conditions or at the Manager’s discretion. Investment involves risks including the possible loss of principal amount invested and risks associated with investment in emerging and less developed markets. The Fund may invest in financial derivative instruments and/or structured products and be subject to various risks (including counterparty, liquidity, credit and market risks etc.). Investing in fixed income instruments (if applicable) may expose investors to various risks, including but not limited to creditworthiness, interest rate, liquidity and restricted flexibility risks. Changes to the economic environment and market conditions may affect these risks, resulting in an adverse effect to the value of the investment. During periods of rising nominal interest rates, the values of fixed income instruments (including short positions with respect to fixed income instruments) are generally expected to decline. Conversely, during periods of declining interest rates, the values are generally expected to rise. Liquidity risk may possibly delay or prevent account withdrawals or redemptions. Past performance, or any prediction, projection or forecast, is not indicative of future performance. Investors should read the Prospectus obtainable from Allianz Global Investors Singapore Limited or any of its appointed distributors for further details including the risk factors, before investing. This publication has not been reviewed by the Monetary Authority of Singapore (MAS). MAS authorization/recognition is not a recommendation or endorsement. The issuer of this publication is Allianz Global Investors Singapore Limited (79 Robinson Road, #09-03, Singapore 068897, Company Registration No. 199907169Z). Admaster ID: 2915503
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