Posted inAnalysisEmerging MarketsFixed Income

ANALYSIS: Fixed maturity funds – Has the opportunity passed?

Therefore, charging an active fee is justified, Berger contends. The ongoing charge for the institutional share class of the Axa IM Maturity 2023 fund stands at 1.29%, compared to 1.47% for Axa’s European high yield bond fund, which is also managed by Berger.   

The 1.29% fee compares to just 0.7% for the Credit Suisse fund. That’s quite a gap, and it will take some outstanding management skills to make up for that. 

Take your profits

This leaves the question why investors would actually consider to invest in a fixed maturity fund now. Since spreads are now below the long-term average, wouldn’t it make sense to wait until they are a bit wider?

Though investors should not expect a similar return as those who invested in Credit Suisse’s previous fixed maturity fund (it returned 8.3% since inception), Gadsby suggests fixed maturity funds now present an excellent opportunity for investors to take profits after spread compression over the past year. 

“In emerging market debt, spreads have narrowed by 200 bps. The duration of the index is seven years, so this means a capital gain of 14%. Investors can take this profit and rebalance into a more defensive structure. That’s why we’re launching such a fund at the end of April,” he explains. 

Whether now is the right time to invest in a fixed maturity fund basically depends on where you’re coming from. Considering it’s the bond issuers who are currently looking to lock in low yield by refinancing bonds, as observed by Axa’s Berger, it’s probably not the right time if you are looking for an attractive coupon. You’d probably better wait a bit. 

But if your purpose is to reduce risk and take some profits, it may well be the right product now. 

Not a flash in the pan

What is certain though, is that fixed maturity products are not just a flash in the pan. They are especially appealing to ageing baby boomers who have a relatively short investment horizon, and are here to stay. 

“If there’s one huge observation to make since the financial crisis, it’s that outcome-oriented investments are a real trend,” says Gadsby.

Part of the Mark Allen Group.