Mr Tielkemeijer says since equities are often the prominent risk driver in a portfolio, assets that do not have correlation with shares are very useful for diversification purposes.
“Historically, these assets have been fixed income; however, in this extraordinary rate environment some categories within fixed income may no longer provide the risk-and-return profile investors are looking for in defensive assets.”
But he points out that bonds with a lower duration can still be defensive in nature amid an environment of low and even negative yields.
Nick Watson, portfolio manager in the multi-asset team for Janus Henderson, says: “Investors can choose to allocate more to short-dated or lower-duration bonds, which arguably offer compelling risk-adjusted returns relative to longer-dated bonds given the current shape of yield curves.”
The risks are certainly rising for higher-duration debt.
Mr Watson explains: “With much of monetary policy exhausted, the argument for fiscal expansion from more populist-leaning governments is building.”
He adds: “More government borrowing, spending and infrastructure investment would suggest higher inflation, which is a different environment to that of the past decade and would pose challenges for high-duration defensive assets.”
While bonds are still deemed partially attractive, experts point out several other defensive assets that can provide similar diversification benefits.
Alternatives to bonds
Gold remains a popular asset class to include in multi-asset portfolios as a safe haven to mitigate geopolitical risk.
Mr Smigiel says: “Exposures like gold offer opportunities to protect against geopolitical events and general financial calamity. It’s important for investors to maintain diversified exposures to various risk premiums at a total risk level with which they’re comfortable.”
Damian Barry, head of multi-asset multi-management for Mediolanum International Funds, says gold has proven to be a valuable investment when equity markets are in free fall as happened in 2008.
But he warns that gold does not yield any regular income.
“The caveat is that gold doesn’t produce any income, so it can drop relatively quickly, as it did in the second quarter of 2013 when it lost almost 25 per cent, at the time of the ‘taper tantrum’,” adds Mr Barry.
The taper tantrum was a period of panic that caused a spike in US bond yields after investors found out that the Federal Reserve was intending to cease its quantitative easing programme.
Mr Watson says: “Asset allocators can express a defensive stance within their equities by allocating to high-quality defensive companies. Alternatives, such as infrastructure assets or gold, also have defensive characteristics with complementary return streams to equities and bonds.”
Some in the industry have suggested that cash and exposure to foreign exchange can also be a defensive strategy.
Mr Watson says: “Cash is a tactical tool for dampening volatility and managing drawdowns. With bonds and other defensive assets looking expensive versus history, cash may prove to be better protector of capital than conventional bonds.”