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Is it short duration...?

aroominyork
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edited 5 August at 1:05PM in Savings & investments

Royal London Short Duration Credit has, according to its fact sheet, a duration of 3.32 years. The fact sheet also shows its ten largest holdings having maturities of 2051, Perp, 2035, 2035, 2034, 2029, 2032, 2032, 2034, 2032. Are the largest holdings atypical of the overall fund or is something else going on?

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  • masonic
    masonic Posts: 30,830
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    The top 10 holdings only make up 10% of the fund. 50% of the fund has >5 year maturity and nearly 30% matures within 3 years.

    There are over 350 holdings, so plenty of small allocations to balance the long duration top 10.

  • aroominyork
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    edited 5 August at 4:24PM

    Good point about maturity vs. duration. AIUI, duration is linked to interest rate sensitivity and so is more a factor in higher yielding bonds where a base rate change will have a greater impact than on AAA/AA bonds.

    Regarding 'off benchmark', while the fund is not IG it is not HY either. For me it hits a sweet spot of consistently good returns with low volatility.

  • poseidon1
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    Also worth noting that the bulk of the top ten holdings are floating ( variable) rate notes that have the flexibility of potentially keeping pace with interest rates rise, and will no doubt have a 'floor' below which the coupon cannot fall.

    This gives FRNs an advantage compared to conventional fixed income securities in environments where rates are rising ( as we saw post 2022) where FRNs appear to have really come into their own.

    Useful investopedia article below, which gives a little insight into Royal London's likely predilection for the inclusion of medium/ long dated FRN/VRNs within their short duration bond portfolio -

    https://www.investopedia.com/terms/f/floater.asp

  • masonic
    masonic Posts: 30,830
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    edited 5 August at 10:17PM

    I suppose floaters do tend to have a long duration.

  • OldScientist
    OldScientist Posts: 1,108
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    How short is 'short'?

    For UK gilts - maturities under 5 years are 'short', so a fund with a weighted duration of 3.3 years might be considered as being towards the long end of short.

    Anyway, it should be fairly robust against changes in yields - it only dropped by about 10% in September 2022 and recovered (in nominal terms) about a year after that.

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