Is this new bond fund the answer for cautious investors?
The new Fidelity Short Dated Corporate Bond fund is designed for investors who desire a higher yield and risk profile than cash and government bonds, but who consider a conventional corporate bond fund a step too far.
Short duration strategies invest in bonds with short-term maturity dates. They can offer investors greater protection against interest rate risk than longer bond duration funds.
The Fidelity fund aims to achieve both capital growth and income in a conservative manner by investing in a diversified portfolio of investment grade bonds, with a remaining maturity of five years or less.
Sajiv Vaid, portfolio manager of the Fidelity fund, 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 with a cautious outlook.”
Adrian Lowcock, investment director at Architas, said the fund’s launch is well timed and the team has a considerable amount of experience in navigating the bond market.
“Fidelity has the expertise to make money just through good credit selection and by focusing on that alone they are playing to their strengths,” he said.
“This fund could be suitable for investors concerned about the future returns offered by bonds or those looking to get a little extra income than currently offered by cash.”
But he said the problem with these types of fund is they are restricted to just one part of the market.
“The challenge with short duration bond funds is that by focusing on one part of the market they cannot make money by moving into longer dated bonds. Many managers have been switching from long to shorter dated bonds in 2016 as the outlook for interest rates changed. This has been beneficial for some managers but also lost investors money when other managers got wrong-footed.”
For investors looking for funds with the flexibility to adjust duration, Lowcock suggests Invesco Perpetual Corporate Bond and Kames Investment Grade Bond.