Talking Point  

Corporate bonds 'cannot' protect against volatility

Corporate bonds 'cannot' protect against volatility

Almost two thirds of advisers (63 per cent) believe that corporate bonds will not protect investors’ capital from the volatility in the stock markets right now, according to the latest FTAdviser Talking Point Poll.

Alistair Cunningham director at Wingate Financial Planning said he believed repositioning a portfolio to be more heavily in corporate bonds solely to protect against volatility was unwise. 

He added: “Corporate bonds are a useful diversifier to sit alongside equities but any perceived protection is only theoretical, and in some investment markets may not work. 

“The credit crunch in 2008-2009 is a good example where both of the main asset classes fell at the same time.

“Losses are inclined to be temporary in any case, so it’s more important an investor has the stomach to withstand dread scenarios as well as the financial capacity to weather any downturn – invariably the worst thing that can happen is to sell out in a declining market.”

Government bonds are often seen as the most defensive area of the bond market and therefore have arguably the more defensive classes so are likely to better protect investors if concerns over the market or economic outlook are significantly higher. 

Adrian Lowcock head of personal investing at Willis Owen said corporate bonds in this situation would be less defensive as there was always the risk that a business could go under in a deep recession, as even the bond prices of financially stable businesses can suffer during a downturn. 

He added: “Corporate bonds might appeal if the interest rate spread between them and government bonds widen so the yield of corporates remains higher relative to government bonds. 

“This effectively means that investors are getting rewarded with a yield for taking on the risk of investing in corporate bonds and will be better protected should sentiment shift and become more positive.”

“The market is in a holding pattern, the next phase for the global economy is not clear with sentiment and expectation changing on the latest piece of data.

“In this climate, the equity and bond markets can swing as investors switch from risk-on, to a risk-off attitude, which means whether you invest in shares or bonds you could end up on the wrong side of sentiment and for bond investors this could be painful if the economic outlook improves, volatility stops and the equity market starts to perform. 

“The best approach in the current climate is to have exposure to strategic bond funds as these have the flexibility to invest across the whole market.”