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AXA corporate bond set for turnaround?
By Rob Griffin
With safe investments such as bank deposit accounts and gilts providing such miserable returns, Theodora Zemek of AXA Investment Managers says it makes sense to explore the world of corporate bonds.
The experienced manager of the £118.5 million AXA Sterling Corporate Bond fund believes that fixed income products are offering a far higher level of income than is available anywhere else in the market. "The only lending that's really going on right now is through the corporate bond market," she says. "It's a relatively safe place for investors to stash some of their money right now - and about the only place to get a decent income."
The AXA Sterling Corporate Bond fund, which was launched at the end of January 2004, aims to generate returns through exposure to the sterling-denominated corporate bond markets both in the UK and overseas. "A corporate bond fund should be a clear, straightforward vehicle for conservative investors that will protect on the downside and generate a decent level of income," she adds. The fund is currently yielding an income of 8%. Zemek's investment process begins with a rigorous monthly analysis of key economic indicators, and then moves on to examine broader trends and how these are likely to influence various sectors.
Her ideal holding is a company that is not highly leveraged and which generates decent cash flows. Ensuring there's a broad level of diversification within the portfolio is also important. "I find 100 holdings is a good number for a decently diversified portfolio," she says.
When Zemek took up the reins of the fund at the beginning of last October, she moved quickly to dramatically reduce the fund's heavy exposure to financial stocks, which have been hit so badly over the past year. She also ensured the portfolio was defensively positioned by focusing on utilities, consumer non-cyclicals and pharmaceuticals. "I'm downplaying anything heavily dependent on discretionary consumer spending," she explains.
Zemek expects the coming year to be tough, with volatility remaining high in the near term and the looming prospect of corporate defaults becoming reality as companies struggle to cope with harsh economic conditions. "Markets will continue to be difficult, but I think we'll see global finance markets settling down a bit, and things will start to improve."
In fact, she pays scant attention to the gloomiest predictions for the economy and insists many companies will survive the downturn and still be here in five years' time.
"The whole point of a corporate bond fund is to get a highly diversified portfolio of quality holdings that will reduce risk yet also give you as much capital protection and income as possible."
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