Fund firms 'will lose money' without short-duration push

Fund firms 'will lose money' without short-duration push

A flurry of short duration fixed income fund launches is a necessary move for investors eager to mitigate bond risks and for asset managers hoping to see inflows return, according to fund selectors.

Short duration strategies have been around for several years but launches have accelerated in 2016 after a renewed rally in fixed income pushed prices to record highs.

Last week, both Morgan Stanley Investment Management and Standard Life Investments launched new products in the space. They joined the likes of Aberdeen Asset Management, Axa Investment Managers, Royal London Asset Management and Canada Life Investments in debuting short-duration portfolios in recent months.

Some fund buyers suggested asset managers are now scrabbling to ensure their product range is suitable for a shift in mindset among fixed income investors. Signs of this shift are already starting to emerge: UK ten-year gilt prices have fallen more than 4 per cent in October, their worst monthly performance in seven years.

Duncan Blyth, an investment analyst at Tcam said: “If you are a fund house and you don’t have a short duration offering you are going to lose money.

“If that’s not in your arsenal, you are going to have outflows. It’s an easier conversation with clients [if you have such a fund]."

Seneca Investment Managers Alan Borrows  remarked: "Is it too late [to launch short duration bond funds]? Probably not. It makes sense for investors to have a look at those sort of products."

The short duration debuts are among 48 bond fund launches available to UK investors so far this year, figures from Thomson Reuters Lipper provided to Investment Adviser reveal.

However, this is dwarfed by the 118 equity-focused funds launched over the same period - at a time when UK investors have exited from the asset class to the tune of £7.8bn in net outflows, according to data from the Investment Association.

This aspect of the fund launch picture was met with more of a mixed reaction by fund selectors. Rory McPherson, head of investment strategy at Psigma, said he was "surprised" at the number of equity products still being launched.

"There's probably demand for some active domestic products to keep up with the smart beta strategies," he said. "But the core markets are fairly well congested. If you look at the base regions we are pretty well covered."

Both Mr McPherson and Mr Borrows, however, said equity funds could prosper if they embraced a particular sub-sector. The former highlighted European financials, which have fallen 7 per cent this year, while the latter pointed to emerging markets - which have returned 13 per cent in 2016 - and equity income strategies.

Mr Borrows added: “There’s the paucity of yields and fewer less risky bonds, so the interest in income may be driving that [equity fund push].

“Emerging markets have also been under something of a shadow but performed an awful lot better this year – there’s plenty of potential there.”