Partner Insight: Balancing risk and return on the maturity spectrum
We asked Fidelity's Sajiv Vaid and Kris Atkinson, who manage Fidelity's MoneyBuilder Income and Short Dated Corporate Bond funds, about the implications of the flattening of the yield curve
Sajiv Vaid: Whilst we subscribe to the "lower for longer" thesis when it comes to interest rates, there is no doubt that as rates have moved lower, interest rate or duration risk has probably become more asymmetric in direction.
The flattening of the yield curve in the UK means investors currently give up relatively little spread to move inwards on the maturity spectrum. In this environment, short-dated bonds look attractive as they allow investors to sweat their cash while taking a relatively small amount of credit and duration risk. We've seen growing interest in short-dated bond funds globally and for UK investors we launched the Fidelity Short Dated Corporate Bond Fund back in 2016 to meet this growing demand.
Ultimately, we would always point to the benefits that duration can provide should risk-markets turn and it is notable that a number of flags indicate we are moving ever closer to the end of the cycle. In this environment, longer duration bonds benefit from being lowly correlated to equities and also offer a higher level of income which is clearly attractive.
Kris Atkinson: Within the MoneyBuilder Income portfolio it makes sense to hold both long and short-dated bonds from a diversification perspective. We believe that investors are looking for three core attributes from their bond portfolios - income, low volatility and diversification away from equities - and that one can achieve this outcome using a mix of short and long-dated bonds.
This information is for investment professionals only and should not be relied upon by private investors. Investors should note that the views expressed may no longer be current and may have already been acted upon. The ideas and conclusions here do not necessarily reflect the views of Fidelity's portfolio managers and are for general interest only. The value of investments and the income from them can go down as well as up and clients may get back less than they invest. Past performance is not a reliable indicator of future returns. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuer's ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between different government issuers as well as between different corporate issuers. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the Fund investing in them. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investments in Fidelity funds should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0120/23529b/SSO/NA