Why short duration?
Short duration strategies can play a strategic role in an investor’s portfolio by potentially mitigating interest rate risk, managing liquidity, enhancing cash returns and providing potentially steady and consistent income while limiting volatility regardless of the market cycle.
Short Duration is not one homogenous asset class and offers a range of outcomes for different investors needs. These outcomes are not mutually exclusive and many of the investment offerings may offer two or more of these outcomes.
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Short duration strategies, with their typical maturities of up to three or five years, should offer a suitable bridge between cash holdings and longer-term fixed income investments.
This is because they allow for harnessing income, while mitigating the impact from rates or spread volatility.
While the benefits of core short duration strategies such as investment grade credit and high yield bonds are clear, other fixed income sub-asset classes, such as inflation linked bonds or emerging markets are less discussed.
However, these strategies could reduce correlation to traditional fixed income assets, thereby enhancing risk-adjusted returns.
Short duration strategies could act as a tool to generate positive total returns in an uncertain environment given their natural income generating component.
Short duration bonds within asset classes such as high yield or emerging markets may therefore be an option to access higher income and growth while still mitigating against interest rate risk.
Many investors may look for a flexible approach during periods of uncertainty as it provides the potential to exploit opportunities available in the global short-dated fixed income universe via active asset class and sector allocation as well as active management of duration across currencies.
Investors targeting net zero objectives or wanting to generate positive and measurable real word outcomes can also do this through short duration strategies without compromising on returns. When reflecting responsible investing in a portfolio, there are two main approaches to consider:
- Carbon transition strategies: These strategies focus on seeking opportunities associated with the transition to a low-carbon economy and gradually reducing exposure to carbon emissions.
- Green bonds strategies: Green bonds finance projects that are focused on a positive environmental impact and that ultimately contribute to the transition to a low carbon economy.