we see this as a well-managed fund providing a degree of protection in increasingly volatile markets.
Over the past ten plus years bonds have enjoyed a bull market; this is likely coming to an end. Investors can no longer expect the same level of returns and potentially there could be greater volatility. Volatility is what investors hate – this is the swing in the value of their investments, either in a positive or negative direction and for bond investors it’s definitely not what they are after!
To tackle this we are seeing bond like funds (with low volatility) and pure bond funds which look to thrive in this environment. We are nervous of bond funds which adopt complex strategies for little perceived return however we are also aware that investors who like bonds will still want bonds.
One fund which is attracting investor attention is the AXA Sterling Credit Short Duration Bond Fund. This is seeing money coming from investors who want to move up the risk scale so from cash to bonds in the hope of better returns, and those who are currently in bond funds but are worried how they will respond to a rising interest rate environment and therefore want to reduce the level of risk they are exposed to.
It’s important that investors’ expectations are set at the start; this fund is unlikely to deliver double digit returns. In the current environment the manager expects returns to be around 2% but he believes that as interest rates rise so the returns will increase to ensure it continues to deliver above cash returns. The crucial part of this is that the manager will deliver these returns whilst keeping volatility at currently below 2%. For many investors this may be attractive either as a standalone investment or as part of a portfolio of investments.
The returns are not guaranteed and it can deliver negative returns so there remains risk especially for those who are moving out of cash and want their capital protected.