067 | Introduction to short duration bonds

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  • Nicolas Trindade, Fund Manager, AXA Investment Managers

Learning outcomes:

  1. The main characteristics of short duration bonds
  2. The drivers of the short duration bond strategy
  3. The different ways fund managers run short duration portfolios
  4. Channel

Learning outcomes: 1. The main characteristics of short duration bonds 2. The drivers of the short duration bond strategy 3. The different ways fund managers run short duration portfolios Tutor: Nicolas Trindade, Fund Manager, CFA, AXA Investment Managers PRESENTER: Hello and welcome to Akademia. In this learning unit on short duration bonds, I’m joined by Nicolas Trindade. He is Fund Manager at AXA Investment Managers. Nicolas, first of all what is a short duration bond? NICOLAS TRINDADE: So a short duration bond is a bond with a short maturity, and what we mean by short maturity will depend on the market we look at: • If you look at the sterling market short maturity bond would be less than five years; • If you look at the euro market that would be less than three years; • If you look at the dollar market that would be also less than three years. And the reason why the maturities differ across market is simply because of the size of the investible universe. Because the sterling short-dated market of less than five years is £100 billion sterling versus €400 billion for less than three years for the euro market; and if you look at the dollar market with bonds maturing in less than three years that will actually be more than a trillion dollars, so very vast market. PRESENTER: And does it just cover corporates or does it also include high yield and government bonds? NICOLAS TRINDADE: It’s up to you. I mean it’s really up to you. In my fuind particularly I’ve mostly focused on investment grade corporate bonds, but you could buy short-dated high yield bonds. You could potentially also buy short-dated government bonds, that’s not an issue, all depends on what is your investible universe. PRESENTER: So crucially if you’re an investor you need to work out what your fund manager’s definition of short-dated is. NICOLAS TRINDADE: Exactly, and in what kind of bonds they are investing. PRESENTER: Is this a growing market though? NICOLAS TRINDADE: Yes, it’s a growing market, and particularly in sterling because we’ve seen quite a lot of issuance at the front end over recent years. And that has been quite interesting. And if you look at the data coming back to the last five years, I mean five years ago the size of the market was about £75 billion, where now it’s over £100 billion, so very clearly we’ve seen an increase in size of the short-dated market over the last couple of years. PRESENTER: Are companies particularly keen to issue short-dated paper at the moment? NICOLAS TRINDADE: That may seem a bit counterintuitive, but what we’ve seen in the sterling market is more issuance at the short end: less than 10, less than five years, rather than the long end, 15 plus. That seems a bit counterintuitive because if you are a corporate treasurer you would want to benefit from the low yield environment and try to issue as long as you can. But what we’ve seen is a lot of UK corporates wanting to benefit from this low yield environment, but issuing in euros instead of issuing in sterling, because funding conditions in the euro market are better than what they are in the sterling market. PRESENTER: And how much of this is paper that 15 years ago was, I don’t know, 20 years, was 20 years paper and now 15 years later has got five years until it matures? NICOLAS TRINDADE: I mean what I would say is that the majority of the bonds that I buy would be bonds issued 10, 15, 20 years ago that comes into my universe. I will buy some bonds that are issued in the primary market, but the vast majority of bonds that I buy would be in the secondary market, and that would be bonds that were issued 10, 15 years ago. PRESENTER: What are the main characteristics and main benefits of short duration bonds? NICOLAS TRINDADE: Well I think from my perspective there are really three main benefits for me investing in short-dated corporate bonds: • The first one is you benefit from a lower sensitivity to rising yields, because of the lower duration of short-dated corporate bonds.; • The second benefit I believe is the fact that short-dated corporate bonds exhibit lower volatility, which can be kind of attractive in the higher volatility environment that we’re currently in; • And finally short-dated corporate bonds also offer a way to mitigate the impact of challenging liquidity conditions by lowering transaction costs. Source: AXA IM, Bloomberg as at 31/12/2015. *THESE FIGURES ARE ESTIMATES FOR ILLUSTRATIVE PURPOSES ONLY based on turnover of a Sterling Credit portfolio. Calculations for the passive index fund assume that coupons and redemptions are re-invested . Past performance is not a guide to future performance. PRESENTER: Well, you mentioned volatility there, give us an example of how little volatility comparatively there was in short duration bonds. NICOLAS TRINDADE: Yes, so I mean what I think is very good when you talk about volatility in short-dated corporate bonds is to compare that volatility against the broader market, and for that we have two instances over the last couple of years that that was very clear. Source: Bloomberg / Lipper as at 31/12/2015. Short dated Sterling Credit universe represented by BofA ML Sterling Corporate and Collateralized 1-5 Years Index (UC0V). Broad Sterling Credit universe represented by the BofA Merrill Lynch Sterling Corporate and Collateralized Index (UC00). So if you look for example at the “Taper tantrum”, so back in 2013 when Ben Bernanke was the Fed Chairman at the time, and when he announced that they could potentially taper quantitative easing. That triggered a massive repricing in the treasury market and credit spreads widening. What it meant, it meant that for the broad standing corporate universe, the drawdown, the pig to trough performance was over 7%, which is quite a big drawdown for fixed income, and over the same time period the drawdown of the short-dated universe was less than 2%. And what it meant, it meant that over the course of 2013 the short-dated universe slightly outperformed the broader universe. But what is much more important is that it did so with so much less volatility, and that is really the point: offering you access to better risk adjusted returns. Now if you fast forward to 2015, again we had quite a bit of volatility, and that was around the “Bund tantrum”. It’s when German government bond yields went from five basis points to 70 basis points in a matter of week. That again triggered repricing of the bund market, the gilt market, credit spread widening, and again the drawdown on the fixed income market was about 7% when the drawdown of the short-dated universe was less than 1%. And what it meant again, it meant again that the short-dated universe outperformed, slightly outperformed the broader universe but again with so much less volatility, and that is really the point. PRESENTER: Now both of these two charts that you’ve shown us, as you said at the end of it it’s the short-dated credit universe that’s outperformed the main market. NICOLAS TRINDADE: Yes exactly. PRESENTER: How does it perform if we’re in a period where, which is good for the broad bond markets, do they tend to underperform or? NICOLAS TRINDADE: Yes, it will tend to underperform. So what would happen is because short-dated corporate bonds have a lower duration and a lower credit spread duration, what would happen is that if you have credit spread tightening, aggressively, or if you have yields falling, then the short-dated universe will lag the performance of the broader universe, and the broader universe will outperform. But if you are in a risk-off environment where credit spreads widen, the short-dated universe could do better if gilt yields stay the same. Or if you’re in an environment where gilt yields sell off, then the short-dated universe again will do better simply because of the lower duration. PRESENTER: So as a rule of thumb it’s a slightly lower risk, slower lower return asset class. NICOLAS TRINDADE: Exactly, it’s a lower risk asset class versus the broader universe definitely. But what I think is very interesting is that it’s lower risk but you don’t lose out so much on performance despite the fact of being lower risk. That’s why the risk-adjusted performance of the short-dated universe I think is very attractive versus the risk-adjusted performance of the broader universe. PRESENTER: We hear a lot about the bond market suffering from illiquidity, how much of an issue is that in short duration paper? NICOLAS TRINDADE: Well I mean liquidity conditions are challenging, that is across the board for the sterling market in particular, because the sterling market is less deep than the euro or the dollar corporate bond market, and very clearly we’ve seen a decline in liquidity over recent years. And it’s a challenge for all maturities corporate bonds, it can also be a challenge for short-dated corporate bonds, and what is very important is to have a team of dedicated traders that can find and solve the liquidity for you. PRESENTER: But typically if you’re a manager in this space, do you hold bonds to maturity? So there’s a natural liquidity anyway. NICOLAS TRINDADE: It will depend. In the fund that I manage most particularly where we invest particularly up to five years maturity corporate bonds, I would tend to hold on until maturity the corporate bonds, and that is simply because I have on average 20% of the fund maturing on a yearly basis, which means I don’t have to sell bonds to implement active strategies. I could just wait for the bonds to mature. And that I think is a very efficient way of mitigating the challenging liquidity that we have in the sterling corporate bond market. Because just to give you some numbers: Source: AXA IM, Bloomberg as at 31/12/2015. *THESE FIGURES ARE ESTIMATES FOR ILLUSTRATIVE PURPOSES ONLY based on turnover of a Sterling Credit portfolio. Calculations for the passive index fund assume that coupons and redemptions are re-invested . Past performance is not a guide to future performance. I, if you assume a turnover of 75% per annum for the average corporate bond fund, the cost of that turnover will be 75 basis points. It’s a lot of money in the world of the 10 year gilt yield is less than 1½%. It’s a lot of money, so that’s why focusing on minimising transaction costs is very important. PRESENTER: And where do you get your bonds from? I mean are these colleagues who’d run longer maturity products who then sell them on to you so you can keep those transaction costs down? NICOLAS TRINDADE: So there will be different sources for me, different ways of finding bonds: 1. The first way to find bonds, which is the most efficient way, is actually to do it for the primary market - so fresh off the shelf, just been issued by a corporate, so that will be the most efficient cost efficient way of buying short-dated corporate bonds. I could buy it from one of my colleagues, and that could happen because sometimes you manage other types of assets, other types of funds are driven by other things than relative value. I’m thinking for example of insurance assets that are driven by Solvency II in regulations. And some colleagues may end up selling bonds that are still very attractive to me, in which case I will buy them and meet, so very good for them, very good for me. 2. And then the last source would be to look in the market and trade in the secondary market to try to find liquidity. PRESENTER: Now how much choice and diversity is there in the investment universe? NICOLAS TRINDADE: Well I mean this pie chart is very interesting because it really shows that the short-dated sterling credit market has changed quite dramatically over the last five years. Source: Bloomberg as at 31/12/2015. Short Duration Sterling Credit Market = BofA Merrill Lynch Sterling Indices: Corporate 1 - 5 Years (UCOV). (1) Includes: Financials UT2, T1, JSUB, AT1, Industrials & Utility SUB and JSUB. (2) BofA ML Level 3 breakdown for Financials; BofA ML Level 2 breakdown for the remainder of the market. Yields are not guaranteed and will change in the future. And what you can see firstly is that there’s been a massive decrease in the exposure of AAA, AA within the sterling credit short duration universe from 2010 to 2015. If you go back to 2010 32% of the universe was made of AAA and AA-rated bonds; it’s only 17% now. And so what we’ve seen over the last five years is really a trend of downgrades, of a lot of bonds being downgraded from the A, AA bucket towards the BBB buckets. And that appears very clearly when you look at the numbers. But what also I think has been very interesting is the fact that the weight of the banking sector has also dramatically decreased over the last five years from 44% to only 28% today. And that I think is very interesting. PRESENTER: Well let’s pick up on those two points. Why, is it becoming a riskier asset class if there’s less A, AA and AAA-rated paper in there? NICOLAS TRINDADE: Well what I would say is that maybe, in the first place maybe the companies were rated too high. So I think to some extent some of the downgrades were justifiable, because some of the credit trends were deteriorating and that warranted a credit downgrade. But some corporates, they were just rated too high, and as a house we didn’t definitely agree with some of those ratings, and were weighting them internally maybe lower than where they were at rating agencies. PRESENTER: How economically sensitive are a lot of these short duration bonds? To what extent does economic news make much of an impact on the pricing of these bonds? NICOLAS TRINDADE: I guess it will depend on the extent of the economic news. I mean if you talk about like a company that is going through a big restructuring, have posted big losses that we’re not expecting by the market, and actually the survival of the company is being put into question, then that potentially could have an impact on short-dated corporate bonds. But if it is a negative earnings report that wouldn’t necessarily have any impact on short-dated corporate bonds because obviously those bonds will pay you back in two, three, four, five years’ time, and the impact will be very minimal. It’s more that very large impact on the corporate where you have a really big earnings event that was not expected, that could potentially put the survival of the company in question. PRESENTER: Now the second point you mentioned there was the decline of banks as a section of issuers here. Why is that taking place? NICOLAS TRINDADE: Well what we’ve seen over the last couple of years in banks in particular is a strengthening of their balance sheets. I mean banks entered the financial crisis in quite a bad shape with not a lot of excess capital, and since the financial crisis in 2008 what regulators have been doing is pushing banks to build capital buffers. And they’ve been pushing banks to delever their balance sheets. That’s exactly what we’ve seen. We’ve seen banks deleveraging their balance sheets, selling loans, raising capital, selling assets, and what we’ve seen is that banks having less the need to issue in the market. And that trend is very clear here, because the banking sector went for 44% to 28% of the market. And that really shows very clearly that banks have not been issuing over the last five years. PRESENTER: Now the other sector that seems to have been issuing a lot more and is now a bigger part of the market is industrials. It’s not the world’s longest word but what does it encompass, what sort of companies are under that? NICOLAS TRINDADE: Well industrials will be a very broad sector, and it would include companies like auto makers, telecoms, media, energy, basic industry, so it will be a very broad sector including a lot of subsectors. PRESENTER: And we’ve been talking about this universe of three to five year paper and below, but how much choice is there when you get under that, how many issuers are there, how much variety in the types of bond that they offer to you as an investor? NICOLAS TRINDADE: So, if you look at the sterling corporate bond market, you will have about 150 issuers right now, which is not like a very large pool but I think big enough to be able to run a fund, and be active. But then of course a lot of fund managers will look at the sterling corporate bond market but will also have the ability to invest in other parts in other markets. So for example in my case in particular I also have the ability to invest into floaters. I also have the ability to invest to non-sterling, which means that the actual investible universe is much greater than just the 150 issuers I’ve talked about. And the other thing that is very important to mention is that when you look at the IBOX short-dated index or the Bank of America Merrill Lynch short-dated index, it’s one to five years, so the zero to one year isn’t included in the index. That obviously adds you a lot of extra issuers to your universe. So that means that you go from a universe that is just 150 issuers, or you just focus on sterling corporate one to five years, but that is more than doubled when you look at all the names you can invest in too. PRESENTER: You mentioned floaters, is that floating rate notes? NICOLAS TRINDADE: Yes, that’s correct yes. PRESENTER: And are they completely separate to short-dated bond market, or do they overlap then? NICOLAS TRINDADE: Yes, I mean they will overlap to some extent because some issuers will issue fixed rate bonds and floating rate bonds. So they will have some overlap in terms of the issuers. And usually issuers like to issue both types of instruments, because it shows to rating agencies a diversity in terms of funding capability. PRESENTER: And are there more floating rate notes being issued these days? NICOLAS TRINDADE: I think the supply of floating rate notes has been fairly stable. The thing is that the floating rate market is not very big, I mean it’s much smaller than the fixed rate note market, and also it’s quite biased towards financials in Europe. So if you look at floating rate note issued either in sterling and in euros, I would say that about 80-90% of them will be issued by banks. So very highly geared and biased towards banks. If you look at the dollar market it will be very different. I think about 30% will still be issued by corporates versus only 10% in the eurozone and in sterling. PRESENTER: And just going back very quickly to this earlier couple of pie charts from 2010 to 2015, can we deduce from this any particular direction of travel in the market, of how it’s shaping, or is it constantly changing? NICOLAS TRINDADE: It’s constantly changing, because it’s really a matter of how much issuance we have in the primary market, and how much bonds are coming from the five plus into the one to five year universe. So it’s constantly changing all the time. And so the picture in two or three years’ time may be very different according to those dynamics. PRESENTER: Now I want to focus on a couple of potential risks to bond investors. First of all default risk. You were saying though there’s a greater transparency in short-term bonds, but how do default rates compare in the short duration market to the market as a whole? NICOLAS TRINDADE: Well if you look at investment grade corporate bonds, I mean the degree of default will be extremely low because it’s investment grade and it’s the safest part of the corporate bond market, and what I would say is that when you buy short-dated corporate bonds you have a better visibility of companies’ cash flows, and you get a better predictability of the cash flows. And that means that the experience of defaults at the short end should be lower than if you invest in longer dated bonds, and if you do properly your credit work. PRESENTER: So, if you are a fund manager buying 20 to 50-year bonds, how much of that is just guess work and good faith? NICOLAS TRINDADE: Well I mean you will have to do the credit work. Obviously you will have to look at credit trends for the industry in which the company is operating. You will have to look at the shape of the balance sheet, if the balance sheet is strong enough or not, the amount of leverage etc.? But yes, I mean there’s some guess work that has to be done, because obviously it’s very difficult to know exactly where the company is going to be in 20 years’ time. So I think what is very important when you’re looking at companies is to make sure that over the foreseeable future you expect this company to remain in a strong position with a healthy balance sheet. PRESENTER: Another risk that bond investors always worry about is inflation and what that can do over time. Obviously we’re in a period of fairly low inflation at the moment, but how big a concern is inflation as a risk to you? NICOLAS TRINDADE: Well I mean like you said for now inflation is not really at the forefront of my list of worries - which is a bit counterintuitive because with all the quantitative easing that we’ve seen in the UK you would have expected actually inflation to be much higher than where it is currently. But for the moment inflation is not really high on the list of risk for me, and particularly for short-dated corporate bonds. PRESENTER: If inflation were to pick up what sort of impact does that have on a bond with five years or less to run compared to one that’s say got 10, 20 years to go? NICOLAS TRINDADE: Well the beauty of bonds of less than two, three, four, five years, is that obviously you’re going to be reinvest the cash, and that means that you will be able to reinvest in higher yields. Because what you would expect is that inflation rise quite aggressively, you should see basically yields also rise quite aggressively, and if you reinvest all that cash on a regular basis then you will be able to capture faster those higher yields - which won’t necessarily be the case if you invest in 10-year corporate bonds. Because if you invest in a 10-year corporate bond you will have basically capital loss because of the increasing yields, but you won’t be able to benefit from that as quickly. PRESENTER: What are some of the benefits and the risks of investment grade corporate bonds as opposed to non-investment grade space? NICOLAS TRINDADE: So I mean if you look at investment grade corporate bonds versus high yield for example bonds, what I would say is that firstly obviously you benefit from better quality companies, because they’re better rated, they are lower leveraged. So that would definitely be a positive and an advantage over investing in investment grade corporate bonds. You benefit from lower volatility of earnings, which is not necessarily the case for high yield companies. So I think from a fundamental perspective that would be really the two main things. PRESENTER: But given this greater transparency because you’re lending the money for less time, does that mean you would typically have a higher exposure to non-investment grade bonds than you would if you were running an all-duration portfolio? NICOLAS TRINDADE: Potentially yes, because like you said you have a better visibility of company cash flows, and that means that you can afford to take maybe a bit more risk on some companies simply because you invest in short-dated debt, and you have a good view that they have enough cash on the balance sheet to cover your maturity and cover your bond. PRESENTER: One trend we’ve seen a lot of in recent years in the fixed income markets is this emergence of quasi equity hybrid debt, how big an impact is that having on the short duration space? NICOLAS TRINDADE: I mean what we’ve seen is definitely an increase in supply of equity like hybrid debt. And so when I talk about equity like hybrid debt it’s debt being issued by banks or corporates which sits just above equity. So usually they will have a called date, and if it doesn't get called they could potentially go to perpetuity and you may never see your capital back, and on top of that the issuer can also skip coupon payment. So it’s got a lot of the equity features but it’s not equity, it’s still fixed income instrument. And we’ve seen an increase in supply, I mean we’ve seen banks issuing some ECNs (Enhanced Capital Notes), ATO1s (Additional Tier 1 debt within the capital structure of banks), we’ve seen a lot of corporates issuing corporate hybrid. So we’ve seen quite a strong supply of equity like hybrid debt. And if you look right now it represents about 10% of the short-dated universe. For short duration bond fund, I mean there’s different schools and different ways of approaching equity like hybrid debt. Personally I don’t invest in equity like hybrid debt in the short-dated fund that I run, simply because I like the predictability of cash flows. And when you buy equity like hybrid debt you don’t get that, you don’t get the predictability of cash flows, and that for me is very important and a deal breaker. PRESENTER: Now you were mentioning the credit rating agencies, how important a role do they play in the short duration market? NICOLAS TRINDADE: Well I mean rating agencies still play a very important role when it comes to the market, because obviously they will still rate all new issues, and a lot of secondary issues also will be rated by rating agencies. And a lot of pension funds, insurance companies will follow the ratings by S&P, Moody’s and Fitch in terms of allocation by credit bucket etc. So they are still a cornerstone of the fixed income market. PRESENTER: Are they doing a particularly good job? One thinks back to 2007/08 when perhaps their reputation was not at its height. NICOLAS TRINDADE: Yes, I think there’s been a lot of clean up that has happened with the agencies, and I think they are doing a much better job now than maybe they were doing about eight years ago during the height of the financial crisis: being I think much more critical of companies’ business, and maybe more cautious about their ratings. PRESENTER: And on the whole are there many upgrades or downgrades in this short duration space? NICOLAS TRINDADE: Well I mean if you look over the last five years we would have seen more downgrades than upgrades. That has been reflected by the exposure to the BBBs within the short-dated universe. That has definitely increased since 2010. And that’s a combination of ratings in the first place maybe being too high, but also credit trends deteriorating for some companies that are warranted downgrade to BBB. PRESENTER: In broad terms what are the market conditions that favour or work against a short duration bond fund? NICOLAS TRINDADE: So it depends against what you will compare the short-dated bond fund. If you compare a short-dated bond fund against a broader universe, in an environment where gilt yields fall, in an environment where credit spreads tighten, then the short-dated fund and the short-dated universe will underperform the broader universe. In a risk-off environment where credit spreads widen, then you will expect the short-dated universe to outperform. In an environment where gilts yield rise you will also expect the short-dated universe to outperform. But then what is the best environment for short-dated bond fund is an environment where we have a greater rise in gilt yields. Because all that cash that we have to reinvest on a regular basis we will be able to naturally benefit from higher yields, because we’ll reinvest that cash at higher yields. PRESENTER: If you get to the point where the yield on cash is very attractive, what’s the role of a short-dated bond fund then? NICOLAS TRINDADE: Well what would happen is that if the rates on cash is becoming more attractive it’s because most likely the base rate has gone up, and if the base rate has gone up yields will be higher in the fixed income market, which means that the yield on the fund will still be much higher than what you can get on cash. And that, I mean if you look at the short-dated strategies usually we see really two types of clients in this short duration strategy: 1. The first one as you mentioned is coming out of cash, unhappy with cash returns as we currently are. Willing to go up the risk ladder and invest in the next safest thing within fixed income, which would be short-dated corporate bonds, understanding that that is not money market. 2. And then we’ve seen another type of client investing in the average corporate bond fund, worried about renewed volatility, worried about rising gilt yields, worried about challenging liquidity conditions, and keen on de-risking their fixed income allocation and move to short-dated corporate bonds. PRESENTER: But those are very different, fundamentally do you see this as an asset class people should hold strategically or tactically? NICOLAS TRINDADE: For me it’s a strategic allocation within any fixed income allocation. I mean the way I see it is basically having a short-dated corporate bond portfolio as an anchor within your fixed income portfolio, low volatility, consistent incremental returns, and then you can have a kicker in terms of performance which could be a global strategic bond fund for example. But I think it’s very important to have this anchor within your fixed income portfolio that you have a good expectation of what performance is going to be over the next one two years. That I think is quite important. PRESENTER: And how big a percentage of your fixed income exposure needs to be short duration for it to act like this anchor that you’ve described? NICOLAS TRINDADE: Well I mean I guess it will depend also what you hold on the side, because obviously most of investors will run multi asset portfolios where they may have a bit of equity, a bit of fixed income, and a bit of real estate and property and alternative investments. So what I would say is that the higher the proportion of equities and alternative investment, potentially the higher the allocation to short-dated corporate bonds versus the global strategy bond fund for example. PRESENTER: And you’ve touched on some of the different ways that people can run strategies in this space, but what are the most common methodologies for running a short duration bond fund? NICOLAS TRINDADE: Well there’s really two ways. The first way is to invest directly in short-dated corporate bonds. And so the duration that you see on the fund is directly the outcome of the bonds that have been bought. The second way of doing it is to buy all maturities corporate bonds and use derivatives to decrease artificially the duration on the bonds. Personally I believe that the former approach is the most efficient one, because by investing directly in short-dated corporate bonds you benefit from a strong natural liquidity profile. Because you invest directly in short-dated corporate bonds, you could have as much as 20% maturing on a yearly basis, which is very attractive for three reasons: 1. Firstly you can naturally benefit from a rising yield environment because you have so much cash to reinvest on a regular basis; 2. Secondly that’s a good way of reducing transaction costs, because you don’t necessarily have to sell bonds, you can wait for the bonds to mature and reinvest the proceeds in the names that you like. 3. And finally, in case of very difficult market conditions, you’re not necessarily a forced-seller, because on top of the cash that you hold you have so many bonds that matures - that really helps you to have another buffer of liquidity within your fund. PRESENTER: But I suppose on the flipside you’re potentially missing out on all of those bonds five years and above which have got all sorts of other characteristics that could be attractive. NICOLAS TRINDADE: Exactly, but net-net I still believe that investing directly in short-dated corporate bonds outweigh the benefit that you could potentially have in investing in longer dated corporate bonds, particularly because the volatility that you will experience will be much greater if you do it the second, with the second methodology. PRESENTER: If an investor came to you and said what should I look for in a short duration bond fund manager? NICOLAS TRINDADE: First look at the approach that the fund manager is using to do short-dated corporates, to run a short-dated corporate bond fund. 1. Does he invest directly in short-dated corporate bonds, or does he invest in all maturities corporate bonds and use derivatives to artificially hedge the duration? So that would be the first question I would ask myself. 2. The second thing I would do is look at the shape of the portfolio. Make sure that the portfolio is well diversified, not only from a name perspective but also from a sector and a country perspective. 3. I would also look at the percentage of bonds that matures on a yearly basis to see if this fund benefits from natural liquidity. 4. And finally of course I will look at the performance of the fund. And not only the absolute performance of the fund, but also at the risk-adjusted performance of the fund, because I think we are in a higher volatility environment, and I think it’s very important to look at the risk adjusted performance rather than outright performance. PRESENTER: We have to leave it there. Nicolas Trindade, thank you. NICOLAS TRINDADE: Thank you. PRESENTER: In order for the viewing of this video to count as structured learning you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you. 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