16 Aug 2024
Mark Munro, Investment Director, Fixed Income | Thomas Drissner, Head of Asian Credit Research, Fixed Income, Asia, abrdn
July marks the first anniversary of abrdn’s Short Dated Enhanced Income Fund.
At first glance, the fund might not look too different to other short-dated funds. However, with a global ‘best-ideas’ approach and unique portfolio construction, the fund blends the benefits of money market instruments and credit products, creating what we believe is an appealing option for investors.
In this article we interview fund managers Mark Munro and Thomas Drissner to find out more.
1) Congratulations on the first anniversary of the Short Dated Enhanced Income Fund. Looking back to a year ago, what led abrdn to develop this strategy?
Mark: Most investors will have an allocation to cash or short-dated credit to help with portfolio liquidity and manage risk/volatility. However, this typically means accepting lower yields in return.
To elaborate, most short-dated funds are either money market funds or short-dated credit funds. Money market funds are known for their liquidity, defensive nature and high-quality assets with quick settlement times (T+0 or T+1). The downside? Low yields. By contrast, short-dated credit funds typically focus on 1-5 year credit profiles.
However, they miss out on the wider global opportunities, especially in Asia and emerging markets, forfeiting potentially higher yields. Some credit funds aim for higher yields, which can mean better returns, but they also come with a higher risk of volatility and elevated drawdowns.
We wanted to create a fund that combines the best of money market and short-dated credit products but without the downsides.
2) So, how does the fund stack up as an alternative to money markets or short-dated credit?
Thomas: We believe three things make our Short Dated Enhanced Income Fund stand out and a better option for investors.
First, it offers advanced liquidity, with T+1 settlement time. This compares to T+3 for the majority of EMEA short-dated credit funds.
Second, it offers price stability by investing in higher-rated companies. The portfolio’s minimum average credit rating is A3/A-. It also has a portfolio duration of less than two years (currently 1.3 years), generating a strong, stabilising ‘pull-to-par’ effect and low interest-rate sensitivity. Over 35% of the portfolio is currently invested in cash and bonds with a maturity of less than one year.
Lastly, it offers enhanced yield, which all investors love! Building on our core foundation of liquidity and price stability, we construct a diversified portfolio of yield-enhancing credits. We take a global unconstrained approach, complementing developed market exposures with favoured emerging markets and Asian credits. This enables us to target a compelling yield above money markets and global short-dated credit indices. Over the cycle, we’d expect a yield enhancement of +1.75% over cash per annum (p.a.).
The primary focus of the fund is on short-dated credit investments. However, what sets our portfolio apart from traditional short-dated funds is its unique construction aimed at achieving low volatility, targeted between 1-2% p.a. This approach allows us to position the fund as a credible ‘step out of cash’ solution.
3) What’s supported the fund’s success so far?
Thomas: There are a few reasons why we’ve delivered on our objectives.
First, optimal yield, return and volatility balance: the fund has one of the highest yields versus indices and peer funds, with one of the lowest volatilities, delivering a Sharpe Ratio of 1.6x since inception.
Second, duration sensitivity: the strategy has half the duration of a 1-to-5-year index and 0.5 years shorter than a 1-to-3-year index.
Third, a truly global and diversified approach: our investment approach isn't limited to just the US or Europe; we also seek out high-quality companies from emerging markets and Asia.
Fourth, we leverage the abrdn global research platform: this allows us to source the best risk-adjusted bonds that fit the fund’s profile.
Fifth, portfolio construction: we construct a global 'best ideas' portfolio by utilising an optimal mix of corporate and government bonds, along with cash. The portfolio maintains a minimum average rating of A- with a duration of less than two years.
Mark: In practice, our investment approach enables us to invest in companies such as SK Hynix, a leading memory chip and semiconductor manufacturer. This opportunity came from our emphasis on quality, which allows us to access higher yields and income from an Asian issuer in a growing market segment.
We saw a lower-priced bond opportunity within a stable South Korean economy. We believe SK Hynix, a provider of high bandwidth memory for artificial intelligence processors, is on a positive trajectory, with decreasing debt levels and improving earnings.
4) When’s the best time to invest in this fund?
Mark: We’ve designed this fund as an all-weather investment choice. It aims to provide an attractive outcome throughout various market cycles, offering enhanced yield while ensuring robust liquidity and price stability. As we’ve seen in the first year, we’ve achieved this goal with a low volatility profile. We want this product to offer investors a credible ‘step out of cash’ solution. We believe it does this.
Thomas: That said, we also believe now is the best time for an investor looking to maximise their returns.
Central bank interest rates are at 15-year highs, giving fixed-income investors the potential to earn a better return on their money. This unique time in the fixed-income market comes from shorter-term bonds yielding more than longer-term ones, allowing investors to find low-risk options with appealing values not seen in a long time.
Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.
Risk warning
The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.