When the Aberdeen Sterling Short Dated Corporate Bond fund launched in October 2016, Aberdeen Asset Management (as it was pre-merger with Standard Life) revealed hopes for the fund to reach £100m in assets under management within a year.
It was perhaps a fairly attainable target, given the demand for short duration funds from investors looking to preserve capital in a rising yield environment. Having reached its goal with £130m in assets under management, manager Roger Webb is now eyeing the headier heights of £750m.
“This defensive fund has proved attractive. The strategy is scalable, but not infinitely. It depends on the supply and liquidity in the sterling short-dated market, although 50 per cent of the fund can be invested overseas, which gives us the opportunity to capture a wider pool of assets,” Webb says.
“The fund could grow to £500-£750m, which is probably the optimum. We are still seeing stable flows of £500,000 – £750,000 a day.”
The Aberdeen Sterling Short Dated Corporate Bond fund only invests in investment grade debt and focuses on capital preservation, meaning it has lower volatility than most of its peers, Webb says. It takes a total return approach and uses its benchmark – the iBoxx £ Corporates 1-5 – only as a guide; there is no specific target.
Around 13 per cent of the fund is invested in AAA debt, mainly mortgage-backed securities, with the bulk of the fund in A and BBB bonds, which is where the opportunities are, Webb says. The minimum credit rating for bonds in the fund is BBB and the fund has a hard cap of 15 per cent on extendible bonds and hybrids.
“We are conscious of extension risk and have limited exposure to bonds that can be extended,” Webb says. “We prefer current coupon bonds to avoid capital erosion.”
The fund currently looks a lot like the £112m Aberdeen Strategic Bond fund, with around 60 per cent crossover.
“The Strategic Bond fund looks like a higher risk short duration fund at the moment,” Webb says. “Duration in the fund is close to an all-time low at 2.5 years while the duration for the Short Dated fund is two years.”
Webb agrees with the market consensus that the Federal Reserve will raise rates again in December, but says the movements of the Bank of England are less certain, although a rate rise in 2018 is most likely.
Diversification is key for Webb, who holds 134 positions in the Short Dated fund to counter the “significant downside risk” of corporate bonds.
“There is no reason not to be diversified,” Webb says. “We are worried about the jump-to-default risk and downgrades. We are not trying to be heroic with a focused portfolio.”
Financials make up a large chunk of the fund, with a weighting of 40 per cent. This includes 20 per cent in banks (such as Lloyds, RBS and HSBC) and 8 per cent in insurers (such as Axa, Aviva and Pru) as well as 12 per cent in less obvious areas, such as the financial businesses of auto manufacturers.
“There are an awful lot of banks and insurers at the short end of the market,” Webb says. “Financials offer good value at the moment due to the ongoing deleveraging of the financials sector. This continues to be the case and spreads don’t reflect that.”
Since launch, the fund has returned 0.96 per cent compared to the 1.91 per cent rise in the index and the 0.88 per cent average of the Sterling Corporate Bond sector, according to FE data.
Webb says the investment grade focus of the fund makes it difficult to outperform, as there are few defaults in the investment grade market and the majority of the bonds’ returns come from the coupon.
“It pays as an investors to own high yield, if you want to take the risk. But we want to preserve capital and BBB- bonds can become high yield and worse. So we lag the benchmark in performance returns, but our client base is happy with that.”