A different approach to global short duration
Short duration bonds can be a useful strategy for investors seeking to mitigate the risks of rising yields, challenging liquidity conditions and fixed income market volatility. Global short duration strategies also provide a much higher degree of flexibility to exploit value opportunities between different regions to manage volatility and provide diversified sources of return. Furthermore, short duration bonds can provide investors with higher income beyond government bonds.
There are a number of ways to capture short duration. What route do you follow?
We focus on a ‘pure play’ short duration approach.
We believe that a key ‘quality’ factor is the extent to which the low duration of a strategy is the outcome of using short dated bonds or derivatives. We build our short duration profile solely through the bonds that the fund owns.
Another key area for us is a focus predominantly on bonds with hard maturities. We purposely ignore callable bonds that have short ‘calls’ and long maturity profiles. In this scenario, the callable redemption date determines the duration profile of the bond and therefore understates the bond’s actual duration, which reflects the final maturity date that could occur several years after the callable date.
Bonds with hard maturity dates also limits our exposure to default risk. As we are closer to maturity, there is less time for currently unknown factors to impact the outlook for a company, or for credit quality to decline.
We believe that investing in short callable bonds in a low duration strategy creates hidden duration risks, especially in a period of rising interest rates, and is therefore an area we avoid. Consequently, we remain focused on building an active portfolio of direct global bonds that collectively creates a low duration profile with high levels of transparency.
What is the attraction of global short duration strategies over single-region or sector short duration strategies?
In summary, flexibility and diversification.
We believe there is significant value in judging the differing economic cycles around the world and investing accordingly to generate attractive risk adjusted returns. The ability to blend different fixed income regions and asset classes means we can maintain a balanced portfolio that carefully manages duration risk across economic and credit cycles.
Furthermore, geographic diversification provides two main advantages through the cycle – yield enhancement; and risk reduction.
Different geographies have different technical factors. For example, in the recent market downturn in March 2020, European Investment Grade outperformed US Investment Grade. This was the result of support from existing quantitative easing programmes and lower outflows leading to lower volatility. Having the ability to rotate between different fixed income regions and asset classes provides the team with more flexibility in challenging market conditions to deliver a ‘pure-play’ low duration approach, without artificially lowering duration through derivatives or callable bonds.
On a final note, short duration bonds in regions of lower economic strength can offer higher yields, but still with acceptable risk given their shorter time to maturity.
How flexible can you be in managing the Mirabaud- Global Short Duration Fund?
The Fund has flexibility to move across high yield, hard currency, emerging market bond and investment grade bonds depending on the economic and credit cycle. This flexibility gives us the ability to lean into credit risk at the right time without taking duration risk.
Maintaining the right balance between capturing opportunities and managing risk always remains a priority. We achieve this by limiting the Fund’s exposure in high yield bonds to 49%. This provides us with the flexibility to move between investment grade, high yield and emerging market debt depending on the economic cycle and to do it effectively. We further limit the amount of high yield risk in the portfolio by setting maturity limits. For investment grade, this is 5 years and for high yield, we have set a limit at 3 years.
We are also careful to focus on quality, applying our own analysis and rigorous research methodology to find companies with robust business profiles.
Finally, it is important to manage currency risk, which means all foreign exchange exposure is fully hedged into the Fund’s base currency, which is US dollars. This also means we will not invest in Emerging Market local debt.
What’s the team’s experience in managing short duration strategies?
At Mirabaud Asset Management, we launched a US short duration strategy in February 2016. If we look at the twelve month, monthly rolling returns from the beginning of February 2017, we have experienced one down month out of 43 periods*. This is best illustrated in the chart below and was largely the impact of Covid-19 on fixed income markets in March this year.
This strategy – the Mirabaud US Short Term Credit Fund - changed to the Mirabaud Global Short Duration Fund in July 2020. Our approach to managing short duration has not changed and it is a logical extension of what we have achieved previously. Our focus behind expanding the universe is to create flexibility for the future so that the Fund has access to a broader set of opportunities across different regions to capture yield and maintain low duration.
*Source: Mirabaud Asset Management, 31 July 2020. Past performance is no guarantee to future performance.
Mirabaud - Global Short Duration was previously known as Mirabaud - US Short Term Credit Fund. The name change was effective as of 24/07/2020. As at 17/08/2020, the fund strategy will change its investment universe from US short term to global short term fixed income.
