In fact, over the last two years, cash and liquidity funds as a portion of investor allocations for advisers and wealth managers in the UK has grown by a notable 44% [1]. As shown below, the increasing allocation to cash is also evidenced by the pronounced growth of cash ISA holdings in recent years.

However, UK interest rates are now on a clear downward path, with the current 4% level being the lowest since March 2023. At Aberdeen, our team of economists are forecasting another 0.25% cut this year, with a further 1% of cuts in 2026, which would leave the Bank Rate at 2.75% [2]. 

What's the impact on UK investors?

With inflation expected to stay above 3.0% for this year, this poses a problem for advisers and their clients. What to do with cash allocations as rates come down? As we know, falling rates erode the real income clients can generate from cash, which can be particularly problematic for retirees in the decumulation phase who rely on regular withdrawals. 

This is especially relevant to the UK where the retirement market is significant. Defined contribution (DC) assets have grown by almost 30% since 2019, with the DC market estimated at £1.9 trillion and £220 billion in drawdown at the end of 2023 [3]. With the FCA increasingly focusing on firms demonstrating how their retirement income strategies can meet their clients’ needs [4], we think now could be an opportune time for advisers to review the options available.

Financial Adviser Retirement Investment Strategies

As show above, advisers have multiple retirement strategies available to them. Firms deploying strategies such as ‘Natural yield’, ‘Smoothed funds’, Bespoke’ or the ‘Bucket approach’, may wish to read on…

A viable alternative asset class

For advisers, declining rates create a need to find low-volatility, income-generating solutions that can reliably preserve capital while delivering a sustainable yield. We think an asset class that looks well-suited in this respect is investment-grade short-dated credit. In particular, we think it offers the best balance in terms of yield enhancement above cash and stability, which is facilitated by the key features of low credit risk and low duration.

With regards to stability, as shown below, it is worth noting that the BofA 1-3 Year Global Corporate Index recorded just one negative total return over the last 28 calendar years. The year 2022 was one of historic negative returns across fixed income; however, even then, short-dated credit still convincingly outperformed all maturity indices, such as the Bloomberg Global Aggregate - Corporates Index, which was down over 14% [5]. 

Introducing our Short Dated Enhanced Income strategy

In response to client demand, we have designed a strategy within the short-dated credit space that is expressly intended to be an all-weather type of ‘step out of cash’ solution.  Our active Short Dated Enhanced Income (SDEI) strategy aims to provide an attractive yield and a total return of +1.75% above cash, over the long term, while limiting volatility and drawdowns.

Crucially, the strategy's portfolio of global short-dated corporate bonds offers quick access for investors with T+1 settlement. Stability is ensured by only investing in high-quality securities that result in at least an average portfolio credit rating of A-, and duration of less than 2 years. In addition to this, we believe the strategy offers three key differentiating factors that should appeal to advisers:

1) A clear outcome focus: The strategy has been specifically designed to deliver the outcome of yield enhancement over cash, coupled with low volatility and minimal drawdowns. This differs from traditional short-dated credit funds, which are more typically constrained by being managed relative to benchmarks.

3) A genuinely global and diversified approach: Most money market funds today tend to be limited by region-specificity (e.g. sterling or euro). However, the SDEI strategy has a genuinely global remit for which it leverages Aberdeen’s global research platform to construct a portfolio of high-quality assets with attractive yields.