Hargreaves Lansdown highlights strategies with sub-five-year maturities as diversification tools and income portfolios.
Short-duration bonds are attracting attention as a lower-volatility alternative to traditional fixed income, with their reduced sensitivity to interest rate movements offering smoother returns for investors amid persistent economic uncertainty.
Bonds with less than five years until maturity experience smaller price swings when interest rates change compared to longer-dated securities, making them a useful diversification tool for equity-heavy portfolios or those built to provide income, according to Hal Cook, senior investment analyst at Hargreaves Lansdown.
“The price of these bonds should change less when interest rates change compared to bonds that have a longer time until they mature. This means the returns from these bonds could be smoother (less volatile) for investors,” Cook said.
“Because of this smoother journey, they can help to diversify portfolios focused on growth or shares,” he said. “They also fit well within a portfolio built to provide income.”
Recently, fund managers have made a similar point, including Schroder Strategic Bond’s Martin Coucke, who told Trustnet that very short-dated credit is offering “attractive spreads”.
Investors can access short-duration bonds directly by purchasing individual UK government gilts maturing within two to three years, which Hargreaves Lansdown’s Cook said are most suitable for retail investors given the low probability of UK government default.
Alternatively, funds offer diversification across multiple underlying bonds, reducing the impact of any individual issuer defaults. For those looking to access the asset class via funds, the investment platform had two picks.
Ninety One Diversified Income is a multi-asset fund aiming to generate a 4% income stream, while limiting the capital loss. The fund invests primarily in global bonds with some equity exposure and had a duration of 1.8 years at the end of March 2026. Its duration has ranged from one to around four years over time.
FE Investment analysts are also positive on the fund, describing it as a “strong solution” to investors with an income target. They said: “Due to its mixed asset – but also defensive – approach, we have been impressed by the capacity of the fund to generate this stream of income, irrespective of the directions of equity and bond markets.”
At 0.79%, the cost is also “compelling”, they added.
Ninety One Diversified Income returned 6% over the year to 31 March, just behind the 6.4% from the IA Mixed Investment 0-35% Shares sector. Over five years, it returned 12.6%, outpacing the sector’s 9.4%.
Performance of fund against index and sector over 1yr
Source: FE Analytics
The second fund highlighted by Hargreaves Lansdown was Artemis High Income, which in addition to bonds has around 15% allocated to UK and European equities for diversification.
It is run by David Ennett, Jack Holmes and FE fundinfo Alpha Manager Ed Legget, who target a higher level of income as equal to, or more than, the average yield of the funds in the IA Sterling Strategic Bond sector. For this reason, it works well as a satellite option to investors looking for a higher yield, according to RSMR analysts.
The fund had a duration of 3.7 years at the end of March, its lowest level since the managers took over in 2021, when duration peaked at six years.
Performance of fund against index and sector over 1yr
Source: FE Analytics
Artemis High Income returned 6.5% over the year to 31 March, outperforming the IA Sterling Strategic Bond sector by 1.6 percentage points. Over five years, it delivered 22.5%, significantly ahead of the sector’s 8.4%.