Action taken by central banks during the coronavirus crisis "challenges the fundamental building blocks" of diversification and balanced portfolios, according to the guests on the latest episode of the FTAdviser Podcast.
FTAdviser's special projects editor David Thorpe was joined by Iain Stealey, chief investment officer for international fixed income at JP Morgan Asset Management, James Klempster, investment director at Momentum Global Investment Management, and Alex Chartres, who jointly runs the Ruffer Total Return fund, to discuss the state of the fixed income market.
They discussed the effects on correlation and diversification of action by central banks to keep economies going during the coronavirus crisis, as well as whether bonds remain an income investment in light of their prices having risen sharply.
Mr Stealey said: "It is more challenging to have a diversified portfolio that people would like, and that people are used to.
"Ultimately when you want a diversified portfolio you want to own high quality government bonds that have the ability to go significantly lower in yield when there’s a big risk-off event and you see spreads widen, and we’re not going to have that ability."
Mr Chartres added: "The negative correlation between bonds and equities is a function of a low inflation world, specifically one that’s below 2.5 per cent, so what you’re going to find is that if the world looks more inflationary in future your principal portfolio hedge is going to be just another liability and that challenges the fundamental building blocks of most people’s balanced portfolios."
You can listen to the full podcast through the video on this page. The FTAdviser Podcast is also available on Acast, Apple Podcasts, Spotify and Stitcher.