Richard Turnill, BlackRock’s global chief investment strategist, said he advocates a strategic allocation to government bonds, despite their low potential return, despite the fact the investment house favours stocks overall.
He said: “We advocate strategic allocations to government bonds including Treasury inflation-protected securities (Tips) for diversification purposes – even in the case where bonds underperform cash.
"We do not advocate large cash allocations, as cash dampens but does not diversify equity risk."
Stocks and bonds are usually negatively correlated, meaning that when one moves up the other moves down.
However, at some points in recent years, this negative correlation has not held true, and share and bond prices have moved together, for example during the 2015 spike in German bond yields.
Mr Turnill said that as a result of this “some investors have lost faith” in the principle of negative correlation.
However, he pointed to the performance of bonds and shares early last week, when North Korea-related geopolitical concerns escalated and equities fell as bonds rose.
He described this as “a timely reminder to diversify equity risk via an allocation to government bonds, in our view”.
Tom Stevenson, investment director at Fidelity, agreed that it makes sense to think about how to protect a portfolio, with the equity bull market well into its ninth year.
He said: “Growing geo-political risks can only increase investors’ nervousness.
“Government bonds are traditionally uncorrelated with equities, although in recent years monetary policy has tended to push both bonds and shares in the same direction.
"If there is an equity market setback, however, it is reasonable to think that the old relationship might reassert itself.
"That is because central banks are acutely aware of what is going on in the markets. Stock market weakness would most likely lead to a reversal of the recent tentative tightening from the Federal Reserve.
"It would certainly persuade the European Central Bank (ECB) and Bank of England to put off interest rate normalisation in Europe and the UK.
“Alongside a slightly bigger cash cushion, bonds could help soften the blow of an equity market correction.”
However, some financial advisers warned that the bonds might not be providing as much stability as they might, because they have become expensive.
Patrick Connolly, head of communications at Chase de Vere, said: “Traditionally government bonds provide the best protection to stock market falls and so should merit a role in investment portfolios for those who want some degree of capital protection.
“However, there is a concern that these bonds are expensive and so rather than providing stability they could potentially be subject to significant falls.
"The best approach is to be selective in terms of the bonds used and their weightings and this can be done by using strategic bond funds managed by good quality investment teams.”
Scott Gallacher, director and Chartered Financial Planner at Rowley Turton, also warned about bond prices at current low interest rates.
He said: “Fixed interest might still be hit in any market fall - it isn’t a perfect hedge.
“Fixed interest would often form a key part of a well diversified portfolio but given current low interest rates I would be cautious about long duration fixed interest and favour shorter term duration fixed interest holdings.”
Matthew Walne, financial adviser from Santorini Financial Planning, suggested that government bonds should “always be held as part of a well diversified portfolio,” no matter what the price.
Darius McDermott, managing director of Chelsea Financial Services, said that although bonds “are not yielding very much so not great value in their own right, bonds are generally lower risk than equities so can provide a good buffer."
He said: “Having a nice mix of assets and being diversified is advisable if markets have a sell off.”
However, financial adviser Sam Blanning, from Star House Financial Service, said that investors should balance their equities with cash, even if advisers can’t advise on it.
He said: “Conventional gilts yield less than most investors can get on cash, with risk of capital loss.
"So they should balance their exposure to risk with deposit accounts rather than conventional gilts, even if advisers can't take a percentage on deposit account holdings."
He said the exception to this was index-linked gilts, which protect against inflation.
rosie.murray-west@ft.com
