M&G Short Dated Corporate Bond GBP I Acc
Why is this fund on our radar?
This fund could offer a first step up from cash for those who want to generate a higher yield without taking too much of the key risks associated with lending to large companies by investing in corporate debt. It has made a place on our list thanks to it delivering steady returns without moving much in line with the bond market. It invests in bonds of companies or the UK state which have a low average maturity, meaning the money is repaid after three to five years. Their value is less sensitive to the movement of interest rates than longer-dated bonds. The fund also invests mostly in investment grade bonds, which means those which are expected to be least likely to see their borrowers default. While these risks are lower than they are in a typical bond fund, they are still present. Unlike cash, an investment in this fund might fall in value, although the managers are able to take active management decisions to try to prevent this as well as to try to add a bit of capital growth too, rather than having to perform in line with the short-dated bond market like a passive investment would.
Skip to Our VerdictPerformance
The returns from this fund are mostly down to the income earned from the bonds rather than changes in the price. Because it invests in short-dated bonds, the sensitivity of the price to interest rates (the duration) is lower. And because it invests in investment grade bonds, those which are expected to have less credit risk, the price and the income should be less volatile than riskier bonds. The main driver of returns are interest rates and the spread that can be earned above interest rates by lending to high-quality companies. The chart below illustrates how important the income return has been to the total return, with the difference between them being the effect of changes in prices of the bonds it owns. Most striking is the very small loss in 2022. While investors received an income of 2%, there was a loss of 2% when accounting for the c. 4% decline in the price of its portfolio. Given this was the worst year for bonds in decades, with double digit losses in broad market indices, this illustrates well how the specific remit of short-dated corporate bonds brings lower volatility in price. On the other hand, riskier bond portfolios are able to deliver higher returns when bonds perform well.
Annual Performance
Source: Morningstar
Past performance is not a reliable indicator of future results
The reason for the large jump in income return in 2023 was much higher interest rates, an important component of the yield that can be earned from corporate bonds. It is worth bearing in mind that as rates come down, the income from this fund is likely to come down too. The other main component of return is credit spreads – the compensation for taking the risk of lending to a specific company rather than the government. These are quite narrow at the time of writing, meaning that extra return isn’t very high. Investors have to weigh the risks of investing to corporates against this extra yield available. In the case of M&G Short-Dated Corporate Bond, the managers have quite an active remit which allows them to lower the risks they take, as discussed in the next section.
Portfolio
M&G Short-Dated Corporate Bond invests at least 80% of its portfolio in short-dated investment grade corporate debt. This can be denominated in any currency, from companies listed anywhere in the world, but will be hedged back into sterling, at a cost. The portfolio includes corporate bonds issued by single companies as well as asset-backed securities which consist of shares in a packaged portfolio of debt. The managers will also invest in government debt at times, and can invest their extra 20% in high yield bonds or other bond funds if they see fit. Investing in bonds from different countries and in different currencies is one of the ways the managers can seek to add value. They can also use derivatives to adjust their positioning, which are sophisticated instruments which allow important positions to be adjusted without spending a large sum of money. Most of the portfolio tends to be fixed rate, but the managers can also invest in floating rate debt, which pays coupons that are linked to interest rates. While the investment remit may seem simple at first glance, the managers actually have lots of levers to pull to add value and adjust the risks they are taking. M&G is a large investor in fixed income by virtue of its institutional fund manager business and it has a large team of credit analysts covering the sector, allowing the managers to draw on ideas from such a broad universe.
Sector allocation
Source: M&G
Our Verdict
We think this fund could appeal to those who want steady income from a portfolio with low correlation to the bond market, due to the low duration and credit risk. It could be considered to be a step up from a cash account, but although the risks are much lower than those of a more typical bond fund, they still exist. The managers have plenty of tools to reduce risk and add extra return, and are well resourced with the weight of M&G’s fixed income desks behind them, but interest rates and the health of the economy (via its impact on demand for lending to businesses) will affect the value of the fund.
It's critical to remember that UK interest rate will be an important driver of returns, and if rates fall the income the fund can generate will fall too, and vice versa. Of course, this is also true on a cash account. Another thing to bear in mind with a fund with low prospective returns is that the yields on offer are nominal, and therefore do not account for inflation.
Key Risks
- Returns will fall if interest rates do
- Compensation for lending to companies is low and could widen in such a way to lead to price losses
- Inflation will eat away at low returns
