Regardless of asset class, a common request from investors looking for income-generating funds is the ability to produce a sustainable income with a low volatility profile. An area we believe can deliver this is short duration investment grade credit. By undertaking fundamental credit analysis and identifying companies with attractive spreads – but with ironclad balance sheets that can withstand any downturn – we are able to construct a portfolio that can deliver a sustainable income stream with limited fluctuation in capital values.
As manager of the Sterling Liquidity Fund, I always keep my eyes out for gilt-edged investment opportunities to help preserve capital. In fact, with UK Treasury Bills yielding as much as A rated bank CDs of late, we have been adding these lower-risk gilt-edged bonds to the portfolio to the extent that at both the 31st of August and the 30th of September, Her Majesty’s Government was the Fund’s largest counterparty exposure.
Fixed income markets have become even more unimaginable as interest rates head lower and the amount of debt with yields below zero higher -- the amount of negative yielding bonds now tops US$17 trillion, which is over a quarter of the global bond market. Bond yields continue to lower because of the shift back to quantitative easing (QE) by central banks this year. The US Federal Reserve cut its main interest rate in July while other central banks continue to debate QE and some suggest negative rates could happen.
Until recently, the Bank of England had been looking upwards since last raising the official interest rate in November 2017. It sent messages for months that a ‘gradual, limited’ rise in interest rates would be needed to stop inflation rising above its 2% target and this led LIBOR (London Inter-bank Offered Rate) rates to edge up as the markets anticipated another hike. Floating Rate Notes (FRNs) – bonds that have short durations and reset their coupon as rates move – were in great demand during this period.
When constructing a fund for investors, the first question a fund manager ought to ask is: “How will I account for redemptions from this fund?” As Jack Reacher, from the famous book series, would say: “Monitor your surroundings and always have an exit.” Such advice is most relevant when the fund is named after the strategy, which is why we make liquidity the most important step in our investment process.