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Surge in short-term bond funds: the fund selector view

Surge in short-term bond funds: the fund selector view

There has been a sudden raft of short-term and target-dated bond fund launches this year, but are selectors shifting assets into these approaches or looking longer term when it comes to fixed income?

With the likes of Credit Suisse, Erste AM, Kames Capital and Anaxis AM among those adding to their short-term and target-dated ranges, will this trend in new strategies continue and will these types of allocation become commonplace as interest rate trajectories change?

According to fund selector Mario Cribari of Lugano-based BlueStar Asset Management, the uncertainty surrounding interest rate hike paths has led many investors to demand a guaranteed yield from funds – even if it is exceptionally short-term in nature.

‘If you look at nominal inflation-linked bond funds, they are running with maturities of seven, eight or even nine years, so you want to bring that down and that is where the shorter-term, shorter-duration funds are becoming popular.

‘This is also a means of limiting drawdown, especially in the high yield segment, which is important at a time when spreads are very tight and there could be more rate hikes and more volatility to come, so the investment case for these new launches is clear.’

Greater visibility

His comments are echoed by Thomas Romig (pictured) of Assenagon. The fund selector and multi-asset specialist told Citywire Selector, while it is not a ‘massive trend’, investors want to know more clearly where yield is being generated on a three- to five-year basis.

‘The main advantage - and why investors are interested – is because of the clear view of yield and even with shorter-term investments, you know what the yield will look like over that timeframe, which is very compelling in this environment.’

Focusing on his home market, Romig said with German 10-year bunds yielding very little and two- and five-year debt in negative territory, there is a clear rationale for investors buying into higher yielding or emerging market debt funds for a short-term boost.

‘From a German perspective that there is appetite for these types of fund given that yields are negative on government debt and you need to generate yield, even if it is somewhat temporary, when markets are squeezed.’

Shorter focus

Selectors such as Omar Gadsby of Credit Suisse previously told Citywire Selector he was focusing on shorter-duration opportunities given the current market. This involved adopting short duration EMD as part of a ‘new core’ for his fixed income portfolios.

Cribari is, however, concerned about the inevitability of some fund houses responding to demand for short-dated or short duration products but only being able to launch once the climate has changed – and perhaps into one which is unfavourable for such funds.

‘One thing we have to focus on, however, is whether they are being launched to meet demand or if fund houses are going to be slow to the party.

‘The last two months were very challenging for bond markets – interest rate forecasts changed again to the downside – and the investment case for these funds could also change quickly again, although it looks unlikely for the time being.’

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