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How did the AMX – AXA Investment Managers – Long Term Credit fund help pension schemes through the 2022 liquidity crisis?
When UK gilts hit turbulence in September 2022, many investors, particularly those with Liability Driven Investment (LDI) strategies, found themselves on the wrong side of hedged positions. That generated margin calls which created a rush to sell assets, further escalating the crisis into October. Investors once again discovered that liquidity is plentiful when you don’t need it, but can run rapidly dry when you do.
Many fund managers saw a sharp spike in redemptions as investors made a dash for cash. This proved the biggest challenge yet for the AMX – AXA Investment Managers – Long Term Credit fund (‘LTC’), since its launch on the AMX platform in 2019. However, we are pleased to say that the LTC stood up well to the unprecedented demand and all our clients got the capital they needed, when they needed it.
What made this situation remarkable is that clients tend to only use credit funds to meet collateral calls as a last resort, when they have exhausted all other sources. That shows just how severe the crisis was and why access to a deep liquid pool of high-quality, long-term credit will always have a place in diversified pension scheme portfolios. There are several reasons why we believe the LTC did well.
The benefits of a purpose-driven ‘Buy and Maintain’ strategy
The LTC was the first buy and maintain fund on the AMX platform with the aim of providing resilient and predictable cashflows for UK pension schemes. Since we launched the LTC in 2019, we have built a strong relationship with the investment management team. We particularly value their ‘Buy and Maintain’ approach to building a diversified, benchmark-agnostic, climate integrated, long-dated credit portfolio.
As well as significantly reducing transaction costs by minimising turnover, this strategy has helped pension schemes avoid becoming a forced seller during a market sell off. This proved critical in the recent liquidity crisis as the high-quality credit portfolio proved resilient to increased risks, avoided turnover and continued to provide good liquidity to fulfil redemption requests from clients. This reflects AXA IM’s credit selection capabilities and its ability to navigate challenging market conditions.
The benefits of flexibility
In this respect, the LTC complements a scheme’s LDI mandates by meeting their cashflow requirements. That ability to deliver liquidity when needed, combined with our ability to provide intra-month trading at short notice (when dealing is usually monthly) proved critical to investors looking for flexibility from their credit portfolio. It also demonstrated why so many clients value AMX’s technologically advanced capabilities and willingness to work with asset managers for the benefit of investors.
Furthermore, AXA IM have confirmed that they saved clients an average of 17 bps on each trade by selling the portfolio’s most liquid and least expensive assets first. As the LTC only experienced a moderate level of redemptions (c£175m of c£2bn + fund), it meant there was no material impact on the overall asset allocation and the majority of those redeemed assets have since been reinvested in the fund.
It is worth noting that despite extreme market volatility during the crisis, AXA IM were still able to meet redemption requests of c£2bn of credit assets across all their cashflow driven strategies within a few days, to meet client liquidity requirements and save clients c£2.5m. This reinforces our belief that they are a strong investment partner for many of our clients.
The benefits of adaptability
We expect the global economy to face another challenging year in 2023, as the effects of inflation and rising interest rates bite. As a result, this may lead to more downgrades in credit ratings within the fixed income universe. In addition, we anticipate an increased use of credit strategies to meet cashflow and hedging needs. We therefore believe that strong credit expertise will matter even more going forward.
Following the 2022 experience, we are therefore looking at offering bi-monthly dealing on the LTC to provide clients with the reassurance of greater liquidity when they need it. At the same time, our clients can still request ad hoc dealing dates from the fund directors, if required.
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Photo by Nick Fewings on Unsplash
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