IFAs opt for steady allocation over bond market 'attraction'
Advisers have said it is important to stick with the strategic asset allocation that has been put in place for their clients despite the changes that are making fixed income look more attractive than in recent years.
Bonds have made a comeback as yields headed skyward. Some £18bn was invested in government bonds (UK and US) in 2023, according to data from Morningstar, and commentators were dubbing it the “opportunity of a lifetime”.
Some advice firms have been shifting their asset allocation against this backdrop. For example, Quilter told FT Adviser last year that it had increased its fixed income allocations for clients, and Evelyn Partners had also increased exposure.
But smaller IFAs have been less eager to shake up their clients’ investments based on market movements.
What matters is whether they are more attractive than the alternatives.Darren Cooke, Red Circle FP“We do not vary a client’s asset allocations in line with market predictions,” said Peter Chadborn, director at the advice firm Plan Money.
“We have historically favoured a pick and stick approach, such as Vanguard LifeStrategy, or one where the fund manager can make relatively small asset tilting calls, such as HSBC Global Strategy or Dimensional World Allocation ranges.”
Chadborn said that active management — whether that be investment funds, in-house portfolios or a discretionary fund manager — did not regularly deliver the extra performance to warrant the additional costs.
Tactical allocation
Darren Cooke, a chartered financial planner at Red Circle Financial Planning, agreed. He said a tactical allocation philosophy, where you constantly change your weightings to try to take advantage of markets, had “time and again proved to be a fool’s errand”.
“Personally, I didn’t make any significant changes away from bonds, nor am I adding to them now,” added Cooke. “Maybe bonds are more attractive in themselves than they were two years ago, but what matters is whether they are more attractive than the alternatives.
“If you move money to increase allocation to bonds, where are you moving it from? Equities? If so, are equities even more attractive than bonds over the next period?”
Bonds are considered an attractive investment at the moment because yields are still high — the US 10-year Treasury is around 4 per cent while the UK 10-year gilt is at 3.8 per cent — but interest rates are expected to come down.
Falling interest rates are typically good for bond investors because bonds pay a fixed interest rate which becomes more attractive as the average rate on the market falls.
This increases demand and pushes up the price, making money for existing bond holders.
The US is expected to cut rates by about 1 percentage point this year, while the UK is expected to cut rates by 1.25 percentage points, but the conviction that the US could cut rates as soon as March has sapped somewhat.
No big changes
But even advisers who agreed that bonds were looking extremely attractive were reluctant to make any big changes to their client’s asset allocation.
“I believe bonds currently look as attractive as they have done since the financial crisis,” said Tim Morris from Russell and Co Advisers.
“But while yields are expected to drop sharply in 2024 when interest rates fall, there is a chance this might not unwind as anticipated. For that reason, I won’t be increasing bond allocation over equities
.“Many of my clients are more heavily weighted in equities and if this remains suitable in the long term, I have no interest in making short-term calls.”
For Paul Gibson, a chartered financial planner at Granite Financial Planning, trying to predict the economy or time the market was “fraught with danger” and “best avoided”.
He added: “Our philosophy is that the financial plan helps to inform the investment portfolio — unless the plan changes then no alteration to the portfolio is required.”
Imogen Tew is a freelance financial journalist
