Short-Dated Sterling Credit Strategy
Capital preservation with a sensible yield
To provide a return above that of the ICE BofA 1–5 Year Sterling Corporate Index over rolling three-year periods, while limiting the fall in capital value when interest rates or credit spreads rise.
Short-dated credit is an unfashionable asset class. It rarely makes the news, and in a good year for markets it will trail almost everything else. That is the point. Its job is to protect capital and earn a steady yield while longer-dated bonds and equities do the more volatile work.
Bonds that mature within five years are less sensitive to interest rates, and they keep returning cash to the portfolio. That cash can be reinvested at current yields, so the portfolio adjusts to a changing rate environment within a year or two rather than a decade.
The strategy launched in October 2016 and is run by Sophie Lindqvist. Insurers, charities and pension schemes use it as a home for reserves, for cash flows they will need in the next few years, and as a lower-risk part of a wider bond allocation.
How we invest
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Short by design
We buy bonds that mature within five years and keep the portfolio's duration between one and three years. We do not stretch for yield by moving further out.
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Our own credit research
Credit ratings are a starting point, not a decision. We analyse each issuer's cash flows, refinancing needs and covenants ourselves, and we avoid issuers whose bonds we would not be content to hold to maturity.
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Diversified, not diluted
No single corporate issuer may exceed 3% of the portfolio. Up to 10% may be held in bonds rated BB, where our research gives us confidence, and the rest is rated BBB or above.
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A buffer of cash and gilts
We keep 5% to 10% in gilts and treasury bills so we can meet redemptions without selling corporate bonds into a weak market.
Key risks
This is not a cash deposit and its value is not protected. The companies we lend to can fail to pay interest or repay their bonds. We spread that risk across many issuers, but a default would reduce the value of the portfolio. Capital is at risk.
When interest rates rise, the price of existing bonds falls. Because the bonds are short-dated, the effect is smaller than in a longer bond fund but still real: with a duration of two years, a one percentage point rise in yields would reduce the value of the portfolio by around 2%, before income.
In a disorderly market, as in March 2020 or during the gilt market stress of autumn 2022, even good-quality short bonds can become hard to sell at a fair price for a period. Our buffer of gilts and treasury bills is there for those moments, but it cannot remove the risk.
Questions investors ask
Is this an alternative to cash?
No. It aims for a higher return than cash over three years, but its value can fall, and it did in 2022. It suits money that can sit for at least 18 months.
Do you buy high-yield bonds?
A little. Up to 10% may be in bonds rated BB, the highest grade below investment grade, where our own research supports it. We do not buy anything rated below BB.
How is income paid?
Monthly, or reinvested. Many charity and insurance clients use the monthly distribution to match their own outgoings.
Find a home for your reserves
If you hold reserves or near-term liabilities in cash and want to know what a short-dated credit portfolio would have done with them, Sophie Lindqvist and the fixed income team will model it for you.
Contact us