What are you trying to achieve for investors and what role could your fund play in an investor’s portfolio? How do you structure this fund?
Cash’s reign as king has ended. But where do investors go from here? Our short-dated enhanced income strategy aims to provide an enhanced return over cash with relatively low risk and high liquidity. That’s why we believe investors who want to work their cash allocations harder might be able to identify a role for this strategy within their portfolios.
We invest in high-quality short-dated global corporate and government bonds, with a significant exposure to assets with less than one year to maturity.
We utilise our global research platform to source compelling ideas that fit the portfolio’s remit to enhance yield and keep risk low. To boost yield, some peers focus on lower-rated bonds such as BBB and high yield, while others focus on exposure to subordinated debt.
We take a more diversified approach by investing in both, but also by expanding our opportunity set to include emerging markets and Asia. We believe applying all three of these components in a risk-controlled way helps to provide a more consistent and improved risk-adjusted outcome.
We aim to achieve price stability by maintaining a minimum average credit rating of A- and keeping duration risk below two years, resulting in expected volatility below 2%.
What are the big opportunities and risks for your strategy in 2025?
The opportunity for our portfolio to perform well continues. Short-dated corporate bonds are in the ‘sweet spot’ of the credit market, offering attractive credit spread with lower underlying risk than the all-maturity credit universe. The yield available on the portfolio is still attractive and with further interest rate cuts likely, there’s the potential for capital appreciation as underlying government bond yields fall.
We continue to find compelling investment opportunities to add value through our global research capability. Having the flexibility to enhance yields from a variety of sources is essential, as these sources of return are not perfectly correlated. We strive to achieve a diversified blend across high yield, subordinated bank debt, Asian and emerging market credit when they offer the most value.
There are two risks in the current environment. The first is a substantial hit to global growth. Our base case is that growth slows quite dramatically in the US but the country will still avoid recession. The second potential risk is a further bout of inflation. Stagflation in the 1970s involved elevated commodity prices and stubbornly high unemployment. We appear to have neither at this time but could certainly have a short-term shock to prices in certain sectors from trade wars and supply chain disruptions.
There’s real risk of further market volatility and a repricing lower of risk assets, including corporate bonds. In this environment, the portfolio’s significant exposure to very short-dated bonds is welcome, providing a ‘pull to par’ effect as bonds near maturity.
Can you identify a couple of key investment opportunities you are playing at the moment in the portfolio? This could be at a stock, sector, or thematic level.
We’ve recently been able to find interesting short-dated callable Tier 2 bank debt to add after the recent sell-off. We’ve also added to aircraft leasing companies, where we find attractive valuations within a sector with strong fundamentals and upgrade potential that may also benefit – in the short-term at least – from the repercussions of tariffs.
We’ve also added exposure to selective utilities. The sector is domestically focused, so it’s not impacted by tariff volatility. The bonds are relatively low-risk in our view, and offer good value compared to historic valuations.
Another interesting part of the market is the auto sector. This subset is at the epicentre of the tariff storm, and the increased uncertainty was reflected in lower prices. However, we believe the market reaction may have been overdone, and that there are now good opportunities to add very short-dated bonds in large global businesses at attractive yields.
The portfolio’s current duration is 1.5 years. We have 15% in short-dated government bonds to manage liquidity and risk, while also seeking returns through 16% in high yield, 20% in subordinated bonds and 30% in emerging markets and Asia – all short-dated exposures.
The value of investments and the income from them can go down as well as up and an investor may get back less than the amount invested.