Selecting the best “callable” bonds
As part of its short-term strategy, our Anaxis Short Duration fund focuses on callable bonds. As opposed to bullet bonds, which can only be redeemed at the end of their life, these benefit from a call structure that allows the issuer to redeem the bond early at a price fixed in advance. This price is higher than par, the redemption price at maturity, as it includes a call premium.
To select the best callable bonds and determine their probability of early redemption, we carry out an analysis of the issuer. We seek to obtain a precise idea of the period during which the issuer will recall its issue, and thus of the remaining life of the bond.
We use several tools to determine these parameters. The Anaxis team maintains regular contact with the management of the eligible companies in our universe. Most of them are transparent and communicate well on their refinancing ambitions and their bond call schedule. In parallel, we study the valuation of the issuers’ yield and credit curves, to identify a possible financial interest in redeeming their bonds early. Finally, other types of transactions in the life of a company may suggest that refinancing is imminent. M&A transactions and IPOs often lead to bond refinancing.
We looked at the universe of callable bonds in the indices over ten years in Europe and the US. Nearly three-quarters of the sample in our investment universe was called not later than the first call date. These bonds, for the most part, do not run to maturity. The profile of the fund and our bonds in the portfolio is therefore very short term, with an average holding period of eight months.
Flexibility to redeploy cash
As a result of this short-term bond profile, we have a very active redemption schedule. On average, 5% to 10% of the portfolio matures or is redeemed early each month. This gives us a lot of flexibility to redeploy the cash from these redemptions according to market conditions. We can be opportunistic, as we were in March and April 2020 during the Covid-19 collapse, when we redeployed our cash at the time into exceptional opportunities. A lot of BB, sometimes even BBB, credit quality bonds had diverged in sympathy with the market. We were able to identify them and position ourselves in them.
This reinvestment activity also gives the fund a protective characteristic, particularly in the event of a rise in interest rates. If a portion of the market were to be repriced due to a rise in rates, the fund would naturally be able to regain exposure to higher-yielding bonds.
Testifying to the stability and regularity of our fund, the monthly performance distribution is concentrated in a range between +0.10% and +0.60%. Since its inception in February 2012, the Anaxis Short Duration fund has had 75% positive months.
Thanks to this approach, the fund has achieved a performance of 5.71% over the last three years (share I – EUR) with a volatility of 2.52% (end of November 2021).
