InvestmentsDec 7 2016

Fidelity launches short-duration bond fund for bearish, yield-seeking investors

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Fidelity launches short-duration bond fund for bearish, yield-seeking investors

Fidelity International has unveiled a short-duration bond fund targeted at investors seeking to reduce their credit and/or interest rate risk profile.

The fund, according to the investment firm, has been designed for investors seeking a more impressive return than that offered via cash and government bonds, albeit at a higher risk profile, but hold a bearish approach to a conventional corporate bond fund.

It targets capital growth and income by primarily investing in sterling-denominated, or hedged back to sterling, investment grade corporate bonds with a maximum maturity of five years.

The fund will be run by fixed income portfolio managers Sajiv Vaid and Ian Spreadbury, who also jointly manage the Fidelity MoneyBuilder Income and Extra Income funds.

The former has returned more than 67 per cent, while the latter returned around 71 per cent over a ten-year period to 17 November, according to FE Analytics figures.

Mr Vaid said: “The yield dilemma is as present as ever in today’s low interest rate environment, with cash allocations eroding real wealth. However, cautious investors are wary of extending risk to capture yield at this point in the cycle.

“While we think yields will remain low in a historical context – given a fundamental backdrop characterised by high debt, elevated political risk and low nominal growth – this fund caters to those investors with a cautious outlook.”

Provider view

John Clougherty, head of wholesale, Fidelity International, said: “We are seeing demand from clients who are looking for low volatility solutions to secure a modest level of income.

“This fund is a natural extension to our fixed income product suite in the UK and will aim to deliver the three core attributes we look for in a fixed income investment; a consistent level of income, low volatility and equity diversification.”

Adviser view

Dennis Hall, chartered financial planner at London based Yellowtail Financial Planning, said: “Short bonds funds are lower risk than conventional corporate bond funds. If the aim is to de-risk, I would say that the fund would need to lower its maximum maturity limit to two years.

“Returns in short duration bonds are not particularly impressive – I am struggling to see how they will get the capital growth and income.

“I think we have seen people change their approach to bonds in recent years. Historically, these assets have been viewed as an insurance type product to shore up a diversified portfolio, but people are now seeking equity-like returns from them.”

He added: “The OCF is fine but if you include the adviser charge or discretionary fund management charge, I suspect that a large chunk of the returns will be wiped out.”

Charges

Ongoing charge figure of 0.38 per cent.

Verdict

On one hand, the launch of the fund is well timed - given that the forecast rise in inflation has seen bond yields creep up. In addition, short term bonds carry a reduced risk compared to longer term bonds inflation of being buffeted by the advent of a further increase in inflation. This would reduce the value of payments, while spike in interest rates, would see bond prices tumble.

However, as Mr Hall said, whether a short duration bond strategy will generate sizeable capital growth and income remains to be seen. Investors seeking impressive returns are likely to have better luck through equity investors – if they are able to stomach the heightened risk factor.