- May 2017 – AXA Investment Managers launches the AXA Global Short Duration Bond Fund.
- February 2017 - Candriam launches its GF Short Duration US High Yield Corporate Bonds Fund.
- January 2017 – Pioneer Investments launches its Optimal Yield Short-Term strategy.
- October 2016 – SLI launches Short Duration Corporate Bond Fund. Aberdeen and Canada Life also both launched short duration corporate bond funds the same month.
- October 2016 - Royal London Asset Management launches the Short Duration Gilt Fund, the Royal London Short Duration Credit fund and the Royal London Short Duration Global Index Linked fund.
- July 2016 – AXA Investment Managers launches the AXA World Funds Global Inflation Short Duration Bonds Fund.
According to Mr Baltora, the impact of inflation-led monetary policy normalisation and financial repression makes the situation “already complex” for investors, even without any acceleration of the current inflation regime.
Therefore, it is understandable why some advisers have been drawn to short-duration bonds for appropriate clients.
He adds: “Investors may look for pockets of value in short-duration bonds offering a higher-than-inflation-income, or inflation-linked bonds with a short duration as, on top of a lower duration, their performance has historically been more closely correlated with realised inflation.”
Patrick Connolly, head of communications for Chase de Vere, agrees that short-duration bonds can provide a greater degree of capital protection, although says this is coupled with a lower yield, which might be a consideration for some clients.
He adds: “While investors should be concerned with beating inflation in the medium to long-term, this may be more of a challenge in the short-term, as fixed interest yields are quite low and inflation is edging upwards.”
Dan Ivascyn and Alfred Murata, managers of the Pimco Income Fund, caveat that higher rates can also translate into higher returns for bondholders, so if advisers are to cut the duration at the wrong time, this could result in missed opportunities.
Nicholas Wall, manager of the Old Mutual Global Strategic Bond Fund, actually likes long duration – that is, some select long-duration in the form of financials.
He explains: “Banks make profit by buying cheaply from depositors and wholesale markets, and lending at a higher rate.
“Profit margins, therefore, have been squeezed by negative interest rates as banks were reluctant to charge customers for their money, and flat yield curves – reducing their earnings spread.
“An inflationary impulse increasing this spread through positive interest rates and steeper curves would likely see financials outperform the broader market.”
Diversification
For Darius McDermott, managing director of Chelsea Financial Services, having a mixture of different bond exposures and durations will be useful for advisers in creating inflation-proof fixed income strategies for their clients.
He explains: “Higher yield, short duration and inflation linked assets (whether that is bonds or assets like infrastructure) are all options.”
Infrastructure as an alternative source has also been highlighted by Fidelity’s Mr Philalithis, who says: “Infrastructure offers attractive inflation protection, with social infrastructure vehicles often linking their payments to inflation.
“This is not so common with economic infrastructure but they still offer good inflation protection generally."
For example, he says the Fidelity Multi-Asset Income portfolio has a holding in the Sequoia Economic Infrastructure Fund. Approximately 50 per cent of the fund’s debt is in floating rate notes, which brings down the duration of the fund to a low level overall.
“The answer, as with many investment questions, is asset allocation and diversification,” says Mr Connolly.
