Wealth managers have cut exposure to bond funds in the years since the start of the pandemic as the higher inflation originating from that period dented sentiment towards fixed income as an asset class.
The data shows that in the two years to the end of December 2023, the average allocation to fixed income funds in the balanced portfolios we monitor has dropped from 29 per cent to 25 per cent, as the initial waves of higher inflation which resulted from pandemic and then the re-opening made the income available from bond assets relatively less attractive.
Within the bond universe, government bond exposure actually rose over the period, from 6 per cent at the end of 2021, to the present level of 7.8 per cent
Christopher Joye, portfolio manager at Coolabah Capital, said the decade before the pandemic was marked by relatively little happening in bond markets, as yields moved consistently lower until the pandemic created “an unprecedented inflation shock”, causing yields to move upwards.
His view is that the present higher yields available accurately reflects the present inflation outlook, and rewards investors for the level of risk being taken.
Joye’s view is that with yields at the present level, there is little need to own high yield bonds.
He added that while government bond yields spiked sharply due to the extra government borrowing associated with pandemic era fiscal supports, “those governments are refinancing those bonds now, which means there is plenty of issuance and should keep yields higher than was the case prior to the pandemic”.
Asset Allocator’s database shows the average allocation to high yield bond funds has been constant at around 2 per cent of balanced portfolios over the past two years.
In contrast, the average exposure to equity funds over the same period is unchanged, with the average allocation largely unchanged from two years ago, being 56 per cent at the end of December 2023, having been 55 per cent at the end of 2021.
David Jane, a multi-asset investor at Premier Miton, said the biggest change in terms of asset allocation brought about by the pandemic has been that higher inflation driving bond yields upwards, and this has restored what he views as the normal correlation between bonds and equities, and rendered the 60/40 equity bond portfolio, which is based on the principle that bond and equities are inversely correlated, as redundant.
