Key takeaways

  • Historically, adding short-dated high-yield bonds to a balanced portfolio has resulted in higher total returns and lower volatility.
  • In contrast to equities and long-dated bonds, returns from short-dated high-yield bonds are driven by the compounding of near-term cashflows rather than by speculation about the future. 
  • An allocation to short-dated high yield can act as a useful hedge and diversifier.

One question our clients often ask is where short-dated high yield ‘fits’ in a portfolio? Should it sit in the ‘risk’ bucket? In the ‘fixed income’ bucket? Or in a bucket of ‘alternatives’? Is it only for income-seeking clients, or can it work for total-return focused clients too? 

With that in mind, I thought it was worth touching on a few of the use cases for allocating to short-dated high yield in a balanced portfolio. This list isn’t intended to be exhaustive and isn’t intended to tell anyone how to do their job. But perhaps it can provide a little inspiration. 

The use case I will touch on first is increasingly common given the changed yield environment over the last few years. This is using an allocation to short-dated high yield as a complement to a more conventional equity-and-bond portfolio (such as the classic 60/40 balanced portfolio). As the chart below illustrates, adding short-dated high yield to balanced portfolios of various risk weightings has historically created portfolios with lower volatility and higher total returns. 

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