Advertisement Feature: S&W offers cautious bond solution

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The Smith & Williamson Short-Dated Corporate Bond Fund is a product of its time, created against a backdrop of low interest rates and poor value for those investors keen to keep a higher proportion of their portfolios in cash.

It offers cautious investors a traditional and transparent vehicle that aims to preserve capital while providing an income in excess of cash. This strategy has certainly proved popular since the Fund was launched in April 2009, attracting steady inflows, with assets under management currently standing at £322.4m*.

“Investors tend to like it because it does what it says on the tin,” says Chris Lynas, who has managed the Fund since launch alongside Ian Kenny. “It has been designed with self-imposed restrictions in place which govern what the Fund can and can’t do. So while the Fund is very much actively managed, there are limits there.”

Mr Kenny adds: “It was created after the banking crisis started, after the Lehman’s collapse, at a time when people were realising that not all corporate bond funds were equal and there was a risk of losing money. We wanted to offer something that had clear parameters in place, with a focus on managing risk.”

For the Short-Dated Corporate Bond Fund this means creating “tramlines” between which the Fund operates in order to control the three main types of risk faced by corporate bond funds: interest rate risk, credit risk and liquidity risk. In the first instance, interest rate risk is mitigated by the short-dated nature of the investments, with the managers only buying bonds with less than six years to maturity. Moreover the managers are looking for high-quality, traditional investment grade bonds, with no hybrids or floaters. Meanwhile, credit risk is managed by maintaining good levels of diversification, with between 50-75 holdings, and by ensuring that there is not a disproportionately high exposure to any one company, with each holding having an equal weighting in the portfolio and a limit of one bond from each company. Finally, liquidity risk is controlled by keeping a minimum of 10 per cent of the portfolio in cash, supranationals or gilts and only buying issues of benchmark size of over £150m.

“It is one of the first of a new breed of corporate bond funds that clearly define the area they are going to operate in and set out exactly what it will and won’t do, far over and above what is set out in the sector guidelines,” Mr Lynas explains.