Think shorter, look wider
Focus is a publication that aims to bring you face-to-face with a selection of key investment managers, advisers, and providers from across the market.
Higher yields don’t have to mean taking on more interest rate risk. The shorter end of the bond market can offer attractive income without the added volatility that often comes with extending duration. In this Focus guide, Aberdeen’s Jonathan Mondillo, Mark Munro and Fergus McCarthy explore why they are looking globally for short-dated opportunities, from investment grade credit to high yield and emerging market debt. Discover why going wider can make more sense than going longer, the risks worth taking, and what this means for investors looking to get more from their fixed income allocation.
IN THIS EDITION
For professional investors only.
Important Information The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future results. For professional investors only. Not for use by retail investors. United Kingdom (UK): Issued by abrdn Investments Luxembourg S.A. 35a, Avenue J.F. Kennedy, L-1855 Luxembourg. R.C.S. B120637. Authorised in Luxembourg and regulated by CSSF. Aberdeen Investments Global is a business name of the foregoing entity.
Making more of short-dated credit
MARKET INSIGHT
Finding yield without reaching for risk
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Are portfolios still built for the last decade? Fixed income is offering more attractive yields than it has in years, yet allocations are lagging. Aberdeen's Jonathan Mondillo and Mark Munro explain where they see opportunities without taking unnecessary duration risk.
Investment grade corporate bonds are yielding in the region of 5.5%, and global high yield sits north of 7%, says Mondillo. Since starting yields remain the primary driver of forward returns, that makes the asset class more attractive than it has been in the best part of a decade, offering income and total return potential alongside diversification against equities and alternatives. The yield is available without extending duration, as curves, while no longer inverted, remain relatively flat by historic standards, says Mondillo. "Investors don't need to stretch out to seven, eight years to get attractive yield opportunities. You can stay short, you can minimise volatility, you can minimise interest rate risk and still clip a pretty material coupon at the front end," he says.
Aberdeen's macro team expects this decade to look very different from the last, according to Mark Munro, Fund Manager at Aberdeen. The previous decade was defined by QE, extremely low yields and inflation struggling to reach target, particularly in Europe. This one is marked by geopolitical events and a more inflationary environment, with inflation now likely to run above target even in Europe. For fixed income that means yields staying structurally higher than investors have been used to over the past 15 years, and more volatility in government bond markets across the curve. “There are huge opportunities to be very tactical there, but it's going to be quite hard to call the turns. So you have to be very good at entry and exit,” says Munro. At a high level, Aberdeen's fixed income team currently sees interesting opportunities in high quality corporate credit, which Mondillo says remains attractive on a risk-adjusted basis. Investment grade private credit also looks attractive at the moment and is very different from lower quality private credit, direct lending and middle market loans, says Mondillo. Emerging markets offer opportunities in countries with improving fundamentals and a supportive policy environment, and there are select areas of securitised credit worth holding, particularly high-grade CLOs rated AAA, AA and single-A. Credit spreads are tight across most credit markets — investment grade, high yield and pockets of private credit — while fundamentals remain extremely healthy, and the Aberdeen team favours areas where valuations remain reasonable. Munro agrees on the higher quality angle given where spreads are. His hunting ground at the moment is the BB and BBB crossover space, kept very short dated, with the aim of capturing an attractive level of yield per unit of risk. Short call Tier 2 and corporate hybrids are relevant core allocations in this environment, he says, provided they are kept short dated. Financials and banks are still attractive, with fundamentals remaining very strong at a time of considerable uncertainty in other sectors, says Munro, adding the team prefers Europe and emerging markets over the US at the margin. US credit spreads are pretty tight, he says, with several negative drivers around technicals and hyperscaler issuance.
New decade, new opportunities
Investors don’t need to stretch out to seven, eight years to get attractive yield opportunities. You can stay short, you can minimise volatility, you can minimise interest rate risk and still clip a pretty material coupon at the front end
The role of duration amid evolving risks
Risks have evolved over the past 24 to 36 months, moving from inflationary risk to headwinds to growth, whether through events in the Middle East or the tariff shocks of the preceding year, according to Mondillo. Broadly, though, the risks remain geopolitical. Equity valuations have largely shrugged off both the tariff concerns and the Middle East conflict and continued to rise, which is what makes the risk asymmetric, says Mondillo. Although an escalation in those conflicts is not Aberdeen's base case, markets have not effectively priced it in, he adds. Another risk is a fiscal one. It has already fed through to rates volatility and elevated sovereign and treasury yields in both Europe and the US. Deficits are rising on both sides of the Atlantic alongside increased spending, putting upward pressure on government bond yields, and Mondillo says he expects that to persist over the next 12 to 24 months. On a shorter horizon, rate hikes will be a key factor, says Munro. Markets are trying to price in one or two, but some investors are not looking for any from the US, and anything that turned the Fed more hawkish would not be taken well by equity markets or credit spreads. The risks of interest rate hikes in the US have risen but may be overplayed now by market pricing, in the view of Aberdeen’s rates team. The team expects another hike in Europe but expects the Bank of England to remain on hold. Looking ahead, the macro backdrop should stay supportive for fixed income. Global growth should remain moderate but positive at around 3%, with the US near 2% and Europe closer to 1%, says Mondillo. Inflation should trend lower, but unevenly. Europe, the UK and pockets of emerging markets are more exposed to energy prices, while the US is more insulated as a net energy exporter. Central bank policy changes are mostly priced by the market, and the credit outlook is relatively benign, with default rates potentially rising but remaining manageable, according to Mondillo. Munro expects credit spreads to end the year moderately wider, though capped by the macro environment and by yield buyers, with the all-in yield offering substantial insulation against that volatility. The single change worth making in portfolios now, according to Mondillo, is to step out from cash. Historically, cash has underperformed short-dated credit, and the excess spread over a money market or liquidity fund is now driving more and more client conversations.
Mark Munro, Fund Manager
There are huge opportunities to be very tactical there, but it's going to be quite hard to call the turns. So you have to be very good at entry and exit
Jonathan Mondillo, Global Head of Fixed Income
espite a recent pick-up in client demand for fixed income across both institutional and wholesale investors, allocations remain structurally underweight in bonds, according to Jonathan Mondillo, Global Head of Fixed
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OUTLOOK
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How does a fund holding Japanese e-commerce debt and Chilean copper bonds end up as Aberdeen's lowest risk fixed income product outside a money market fund? Mark Munro explains how the portfolio is built.
Going global to stay short
FUND FOCUS
With rates still well above where they sat for most of the past decade, money market funds remain a comfortable place for investors to park cash. But they have historically underperformed short-dated credit, and that excess yield is now drawing in those looking to step out of cash, according to Jonathan Mondillo, Global Head of Fixed Income at Aberdeen. However, stepping out of cash usually means taking on duration, and some investors are wary of doing that in an environment expected to be more inflationary and volatile for the foreseeable future. Aberdeen's Short Dated Enhanced Income Fund (SDEI) is built with that concern in mind.
According to Mark Munro, Fund Manager at Aberdeen, SDEI is the firm's lowest risk fixed income product outside a money market fund, but one that reaches globally for yield. “One of the things that differentiates us is how global we are in our approach,” says Munro.
Reaching wide, keeping risk low
The fund also differs in what it can hold at the very short end. A traditional UK short-dated benchmark runs from one to five years, so a bond drops out of the index once it falls below a year to maturity, and a tracker then has to sell within one to three months. An active manager can hold it, but rarely keeps more than 10% of the fund there. By contrast, SDEI holds at least 30% sub-one year to maturity at all times, part of it in cash and government bonds and a substantial part in corporate debt, says Munro. "Roughly 14 months to maturity, a bond pulls to par and, if it’s not defaulting, it doesn't matter what spreads and interest rates are doing; you've just got a yield over cash you're locked into," says Munro.
Investor need
Liquidity Low risk Attractive yield returns
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classic approach
Money market funds Short dated credit funds
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CHALLENGES
Yield vs. liquidity trade-off Credit stability
Outyield money markets and short dated credit
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SOLUTION: Short Dated Enhanced Income Strategy
Enhanced yield
Average A-credit rating* Duration: < 2 years* Volatility: 1-2%* Max drawdown: -3%*
Price stability
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T+1 settlement
Highly liquid
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VOLATILITY BUFFER
Duration: 1-2 years Cash Short dated government bonds
10%-20%
CORE ALLOCATION
Duration: 1–3 years Credit quality A- or better
40%-60%
YIELD ENHANCERS
BBB rated bonds High yield* (max 20%)
30%-50%
*Current exposure: 12%
1 / 4
Munro points to four holdings – a UK water company, a US software group, a Japanese e-commerce business and a Chilean copper miner – that give a sense of the fund's range. Stepping out of cash need not mean stepping out along the curve. The alternative is to go wider rather than longer, Munro says.
Case studies
Anglian Water In the UK, where the water sector is under considerable pressure, the mid-tier and better-quality names are mispriced and still offer good value at the short end. Anglian Water is the name the team has liked for some time, and it has performed well over the past 18 months before struggling a little this year. Set against the quality of the regulated sector globally, even with its troubles, the spread and yield on offer still appeal.
2 / 4
Salesforce In the US, the fund holds Salesforce, bought at its debut issuance in the US market a few months ago. Software has come under pressure over the past year on the view that AI will make much of the sector obsolete within a couple of years, but this is not necessarily true— some companies will go, many will not. The bonds came cheap because of the software premium priced into the market, and for an A-rated credit with no concerns about the viability of the business over the next five years, it is now a core holding in Aberdeen’s SDEI fund.
3 / 4
Rakuten The fund has held Rakuten, the Japanese e-commerce group, since launching just over three years ago. Its mobile business was a challenge some years back but has returned to growth, and the team likes the economics of the e-commerce side, which has grown strongly across Asia and Europe and seen its share of M&A. It is a high yield name, but the ratings look stable and the spread and yield attractive, and with about a year to maturity it still offers value.
4 / 4
Codelco Codelco, the Chilean copper miner, is a more recent holding. Aberdeen remains positive on the copper cycle over the medium to longer term, with the quantity of high-grade copper required for new technology exceeding what is available, and the Chilean mines are seen as good quality. The fund bought three-year bonds carrying around a 30-basis point advantage over equivalently rated BBB names in the US, which Aberdeen says is not to be sniffed at.
Portfolio construction
Duration is held within a one-to-two-year parameter, and the fund must maintain an average credit rating of A- or better, according to Munro.
*Targets are offered as goals and are not referenced to past performance. There can be no guarantee the targets will be achieved.
Important Information For professional investors only. Not for use by retail investors.
Objective: The Fund aims to achieve a combination of income and growth, whilst also aiming to provide liquidity and avoid loss of capital, by investing in bonds with a maturity of up to 5 years. The Fund aims to achieve a yield in excess of the Bloomberg Global Corporate Aggregate 1-3 Year Index (USD Hedged) over rolling three-year periods (before charges).
The value of investments and the income from them can fall and investors may get back less than the amount invested. Past performance is not a guide to future results. The fund invests in securities which are subject to the risk that the issuer may default on interest or capital payments. The fund price can go up or down daily for a variety of reasons including changes in interest rates, inflation expectations or the perceived credit quality of individual countries or securities. The fund invests in high yielding bonds which carry a greater risk of default than those with lower yields. The fund invests in emerging market equities and / or bonds. Investing in emerging markets involves a greater risk of loss than investing in more developed markets due to, among other factors, greater political, tax, economic, foreign exchange, liquidity and regulatory risks. Convertible securities are investments that can be changed into another form upon certain triggers. As such, they can exhibit credit, equity and fixed interest risk. Contingent convertible securities (CoCos) are similar to convertible securities but have additional triggers which mean that they are more vulnerable to losses and volatile price movements and hence become less liquid.
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This is a marketing communication. Please refer to the fund’s prospectus and Key Investor Information Document (KIID or KID) before making any final investment decision. United Kingdom (UK): Issued by abrdn Investments Luxembourg S.A. 35a, Avenue J.F. Kennedy, L-1855 Luxembourg. R.C.S. B120637. Authorised in Luxembourg and regulated by CSSF. Aberdeen Investments Global is a business name of the foregoing entity.
Fund (Gross) (%) Fund (Net) (%) Benchmark (%)
Discrete annual returns year ended 31/07
2026 4.29 4.06 3.79 2025 6.33 6.01 5.82 2024 N/A N/A N/A 2023 N/A N/A N/A 2022 N/A N/A N/A 2021 N/A N/A N/A 2020 N/A N/A N/A 2019 N/A N/A N/A 2018 N/A N/A N/A 2017 N/A N/A N/A
Performance Data: Share Class X Acc Hedged GBP Benchmark History: Benchmark - Bloomberg Global Corporate Aggregate (1-3 Yr) Index (Hedged to GBP). Source: FactSet. Basis: Total Return, NAV to NAV, net of annual charges, gross income reinvested, (GBP). Costs may increase or decrease as a result of currency and exchange rate fluctuations. This may impact what you might get back. "Fund (Net)" refers to the actual unit price performance of the shareclass shown; "Fund (Gross)" adds back charges such as the annual management charge to present performance on the same basis as the performance target / performance comparator / portfolio constraining benchmark. All return data includes investment management fees, operational charges and expenses, and assumes the reinvestment of all distributions. The returns provided do not reflect the initial sales charge and, if included, the performance shown would be lower. Past performance does not predict future returns.
U.S.
This contrasts with the approach often taken by peers in the UK, Europe and the US, who tend to run their short-dated strategies more narrowly, often investing almost exclusively in European corporate or government bonds with heavy allocations to sectors such as European banks, he says. Aberdeen's SDEI fund uses the wide global coverage to look for risk-adjusted yield, while staying within a very short-dated and low risk structure.
WHERE THE FUND INVESTS
Europe
Emerging markets
The fund invests around a third in the US by country of risk, a third in Europe and a third in the widest definition of emerging markets, says Munro. This contrasts with the approach often taken by peers in the UK, Europe and the US, who tend to run their short-dated strategies more narrowly, often investing almost exclusively in European corporate or government bonds with heavy allocations to sectors such as European banks, he says. Aberdeen's SDEI fund uses the wide global coverage to look for risk-adjusted yield, while staying within a very short-dated and low risk structure.
Smaller allocations, bigger decisions
Advisers today have less fixed income to allocate and more depending on it. Aberdeen's Fergus McCarthy explains how the building blocks are changing, what that means for retirement portfolios, and the two things clients still get wrong.
As the old assumption that investors shift into bonds as they age comes under challenge, so too does the role of fixed income within portfolios, according to Fergus McCarthy, Head of UK Client Group at Aberdeen. Looking at risk profiles in the volatility managed sector, the majority of money in the UK is still going into funds holding 70% to 80% in equities, McCarthy says, because most people in the country are building wealth rather than drawing on it. Aberdeen sees the same pattern firsthand in the DC scheme market, where schemes are running at roughly 90% equity and 10% cash, with no fixed income at all. You can diversify your fixed income allocation if you’re allocating 40% of your portfolio to it, but if you’re only allocating 10% to 20% you have to be much clearer about what the allocation is there to do, says McCarthy.
holding less fixed income, but it is the reality most of them are allocating within.
dvisers building portfolios in the UK today have less fixed income to work with than they used to as clients are staying more heavily weighted to equities for longer. This does not mean fund selectors and wealth managers should be
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You could choose these asset classes yourself. Or you could use the Short Dated Enhanced Income fund as your core building block
Fergus McCarthy, Head of UK Client Group
The question people are starting to ask is: what outcome do I want to achieve with my fixed income exposure?
Fixed income allocations have traditionally been built out of component parts: global government bonds, investment grade credit, high yield, emerging market debt, and the different flavours within each. This works when there is enough of the portfolio to spread across them, but at a smaller weighting, McCarthy says, advisers are very limited in how many building blocks they can use. Aberdeen's Short Dated Enhanced Income Fund combines those exposures into one holding, with elements of government bonds, credit, high yield and emerging market debt, and the duration managed inside it rather than left to the allocator. "Yes, you could do it yourself. Yes, you could choose these asset classes yourself. Or you could use the Short Dated Enhanced Income Fund as your core fixed income building block," says McCarthy.
Portfolio building blocks are changing
It comes down to how those asset classes behave in a small allocation, he says. High yield in a portfolio already running 80% equity is potentially not much of a differentiator, because the risk sits alongside the equity risk the client already has. Government bonds tend to be longer dated as an asset class, so a global government bond fund brings duration with it. Short-dated gilt funds give you that government exposure without the duration of the broad index, he says, but a smaller sleeve cannot easily absorb the risk that comes with the wider allocation. At the same time, spreads on investment grade credit have compressed significantly and the yield is not as attractive as it was two or three years ago, which leaves advisers asking whether they are being paid enough for the risk they are taking, according to McCarthy. "The question people are starting to ask is: what outcome do I want to achieve with my fixed income exposure? And if that outcome is purely as ballast to an equity portfolio, then actually what I want is something that's going to deliver a reliable, repeatable and consistent outcome with a decent yield that's not going to have the duration risk around it," says McCarthy.
As more people in the UK are reaching retirement with a defined contribution pension rather than a defined benefit one, the decisions about turning a pot into an income sit with the individual and their adviser rather than with a scheme. There is no single answer, says McCarthy, but a retiree generally needs a pot that replaces a salary, a pot for spending on the things they enjoy, and possibly one set aside for later life care or inheritance. Each has a different job to do, and the salary replacement pot is the one that needs a dependable income without much movement in its value. That is what the fund was built to deliver, says McCarthy, and it can be used by advisers either as the whole of the salary replacement pot or as one component of a broader one.
A new set of retirees
There are two misunderstandings that still come up repeatedly in UK client conversations, according to McCarthy. The first is inflation-linked bonds, which many investors bought during the inflation spike expecting protection. Though they got protection from inflation, the bonds still carried duration risk. The second is emerging market debt, still widely assumed to carry more risk than developed market government bonds. The opposite is now closer to the truth, with developed government bonds carrying both more risk and more duration, says McCarthy. For advisers with a smaller fixed income allocation and less room for error, the key change is making fewer decisions about which asset classes to own, and more about what the allocation is there to do.
What clients still get wrong
