Another Way to Allocate Short-term Assets
Investors often want their portfolios to include some assets they consider "safe" from market risks such as asset overvaluations, an uncertain geopolitical climate, and now from rising interest rates. Cash and GICs can offer that measure of safety – but with yields that are often below the rate of inflation, potentially leading to an erosion of purchasing power over time.
What if a high credit quality investment exists that is designed to provide higher yields with only modestly higher risk than cash-like instruments, and lower sensitivity to interest-rates than traditional bonds?
Consider short duration fixed income solutions
Benefits of Actively Managed Short Duration Investments:
Less Exposure To Interest Rate Risk – Investing in bonds with shorter terms to maturity or coupons that reset regularly to the market rate of interest results in returns that are not as sensitive to, and potentially even benefit from, rising interest rates.
Liquidity – Investing in a mutual fund or ETF structure means assets are generally readily available to redeploy when market opportunities shift, as opposed to paying early redemption penalties on a GIC, for example.
Less Exposure To Interest Rate Risk – Even in short-duration funds, a skilled active manager can adapt to changing market conditions, and tactically manage credit risk and yield curve exposure and aim to deliver higher yield and risk-adjusted total returns.
What is Duration?
Duration is a measure of interest rate sensitivity to the value of a fixed income investment, expressed in number of years.
Generally, the shorter the bond's duration, the less its value will be impacted by rising rates.
Mackenzie's Short Duration Fixed Income Solutions:
The Fund/ETF invests in shorter duration bonds with maturities of 1-5 years. Predominantly holds Investment Grade bonds and up to 15% in High Yield bonds and Loans.
The Fund invests in floating rate securities where the coupons reset regularly in lockstep with short-term interest rates.
Why Short-Term Bonds?
The prices of bonds with shorter terms to maturity move less than bonds with longer terms to maturity if interest rates rise, and there is a shorter time horizon over which the bonds mature and can be reinvested in securities with higher coupons, reflecting higher market yields.
Why Floating Rate Securities?
The coupons on floating rate securities reset regularly to the prevailing short-term market interest rate (e.g. LIBOR). As a result, the price of the securities moves less than fixed rate securities in reaction to rate hikes and higher bond yields.