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Adviser Fund Index

There has been a notable trend in recent months of fund companies bringing short-dated bond funds to the retail market.

Firms such as Swith & Williamson, LV= Asset Management and Axa have joined the likes of Investec and Dimensional in adding short-duration bond funds to their ranges.

The logic has had a common theme – in a prolonged low-interest-rate environment, investors aiming to beat returns on cash have been drawn to relatively low risk short-duration bonds. Managers in these types of vehicles tend to focus on providing a stable but relatively modest income target. While they do not aim for fast gains, it appears that, so far, short-dated bond funds have been successful at raising assets in the market. The Smith & Williamson short-dated corporate bond fund, for example, is over £210m, returning 7.9 per cent since launch in April 2009.

AFH Independent Financial Services head of investment research and Adviser Fund Index panellist Graham Toone says: “I can understand why some managers would be interested in that area, given interest rates. We moved heavily into high yield, however, as we saw a lot of value there.”

The problem, as Toone acknowledges, is early gains in high yield have already been had and, while the market does not yet look overstretched, he plans to review the fixed-income positions in his clients’ portfolios. This may result in more attention to alternative fixed-income products but he says that would largely depend on the gilt market continuing to present little value.

Returns on British government debt remain modest in large part because of the huge inflows of newly printed money under the Bank of England’s quantitative easing. Elsewhere however, short-dated government bonds have been presenting some promise, not least in the troubled periphery countries of the eurozone.

The yield on Greek two-year government bonds crossed 15 per cent last week after news of a downgrade of Greek debt by Moody’s. This compared favourably with the 10-year yield, which ticked up to 9 per cent.

What is interesting is that, until 2013, Greek sovereign debt is effectively guaranteed by the combined EU/IMF bailout packages already in place. Some investors, therefore, are seeing this as an opportunity to buy in.

Given the complexity of fixed-income markets, many panellists chose to move into strategic bond funds at the last rebalancing where managers are given the flexibility to move across both quality and duration spectrums to find opportunities.

Allenbridge director of research Jonathan Wallis says: “We support strategic bond funds as we feel our retail clients are better off in products were specialists make those kinds of investment decisions. I cannot get too excited about short-dated funds.”

Data supplied by Financial Express

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