abrdn calculates £80bn of gilts are set to expire in the first six months of 2025: is it still a good strategy?

February 24, 2025

With bond yields recently hitting their highest levels since 2008 and as markets remain volatile, abrdn predicts that active, fixed income strategies may play an increasingly important role for investors.

Demand for short-dated bonds has been high among retail investors and performance data suggests active approaches can be key when it comes to fixed income.

Demand for UK gilts (government bonds) by retail investors has been notably strong in recent years. This trend has been particularly pointed recently, as the January yields on secondary market gilts – the returns earned by investors looking to secure an income from government bonds – reached highs not seen since 2008.

A significant number of investors have flocked to short maturity gilts (i.e. UK government bonds that are due to mature soon) in recent years because of the compelling yields back on offer for relatively low levels of risk. Global investment company abrdn calculates that, in the UK, £80bn of short-dated gilts (also known as low coupon gilts) are set to expire in the first six months of 2025. A strong proportion of this demand came from retail investors across the major platforms, and has been widely reported.

Mark Munro, co-Portfolio Manager of the abrdn Short-Dated Enhanced Income Fund, said:

“In recent times, thousands of people bought UK government bonds as rates rose. It has likely been a good strategy but there are two reasons that this trade is much harder to replicate moving forward. Firstly, despite the increase in yields globally since September 2024, yields available on low coupon gilts are now anything from 1% to 1.5% lower than their peak in 2023 and below the magical 5% figure. Secondly, two low-coupon gilts mature this year, equating to £80bn, which means the availability of suitable short-dated gilts is disappearing.

The surge has been driven by a number of factors including the attractiveness of short-dated gilts trading at a discount to their redemption value (the amount investors will receive when they mature). This should mean that investors holding to maturity make a profit – which for a gilt is exempt from capital gains tax. Now that billions of short-dated gilts are expiring, investors should think carefully about what to do with their cash next.”

What are the alternatives for investors looking for a low risk, yield-enhancing solution?

For investors seeking low-risk solutions as a substitute for cash or gilts, bond funds are an option to consider. These funds can be actively managed, which means a professional manager invests in a portfolio of bonds for you, or they can be passive i.e. they are designed simply to replicate the performance of an index of bonds.

Research^[1] looking at performance from 2014 to 2023 shows than more than 60% of active global bond funds outside the U.S. outperformed their median passive counterparts, net of fees.

Mark Munro added:

“We understand that for investors seeking low risk alternatives to gilts or cash, these solutions must deliver key outcomes such as liquidity and low volatility. Typically, the ability to achieve these two outcomes results in investors having to either sacrifice yield or dramatically increase risk. We developed our Short Dated Enhanced Income Fund (SDEI) as a means of solving this conundrum.”

The fund aims to outyield both cash and short dated credit and is currently achieving this with a yield of 5.8% (GBP hedged). The fund has been designed to perform throughout the market cycle.

Mark Munro, co-Portfolio Manager of the abrdn Short-Dated Enhanced Income fund, said:

“The fund is not easily replicated by passives due to the fact it fuses together some of the best elements of a money market fund, by investing heavily in bonds with less than one year to maturity, with bonds that have between one and three years to maturity. The former keeps the volatility of the strategy low, while to deliver attractive returns over cash rates it does require an active approach where we select our favoured one- to three-year maturity bonds from across the globe.”

As well as being available to retail investors, the fund has also been designed to appeal to global institutions and has had investment from a wide range of institutional investors, including family offices and insurance companies.

It is managed by two of abrdn’s highly experienced fixed income portfolio managers, Mark Munro and Thomas Drissner. They are integrated into the company’s wider global fixed income team consisting of 140+ investment professionals, operating across one globally integrated research team based in the UK, US and Asia.

The abrdn Short Dated Enhanced Income Fund

Fund objective

The Fund aims to achieve a combination of income and growth, whilst also aiming to provide liquidity and avoid loss of capital, by investing in bonds with a maturity of up to 5 years.
The Fund aims to achieve a yield in excess of the Bloomberg Global Corporate Aggregate 1-3 Year Index (USD Hedged) over rolling three-year periods (before charges).

Key risks

The value of investments and the income from them can fall and investors may get back less than the amount invested.
The fund invests in securities which are subject to the risk that the issuer may default on interest or capital payments.
The fund price can go up or down daily for a variety of reasons including changes in interest rates, inflation expectations or the perceived credit quality of individual countries or securities.
The fund invests in high yielding bonds which carry a greater risk of default than those with lower yields.
The fund invests in emerging market equities and / or bonds. Investing in emerging markets involves a greater risk of loss than investing in more developed markets due to, among other factors, greater political, tax, economic, foreign exchange, liquidity and regulatory risks.
Convertible securities are investments that can be changed into another form upon certain triggers. As such, they can exhibit credit, equity and fixed interest risk. Contingent convertible securities (CoCos) are similar to convertible securities but have additional triggers which mean that they are more vulnerable to losses and volatile price movements and hence become less liquid.