Roger Webb, investment director at Abrdn, said when rates are at current levels everything looks expensive, although credit still offers a real return or real yield.
He added that because some find it quite difficult to justify government bond investment, he is now seeing a higher demand from [adviser] clients for more flexible products that can move the risk dial up and down, to ensure they’re not exposing clients to any downside risks.
“Several years ago the majority [of the 40 per cent bond allocation] would have found its way into eight-year duration, investment grade corporate bonds, and those are great through most parts of the cycle because the spread component of investment grade tends to work in an opposite direction to the government yield component,” he said.
“So you tend to get the offsetting returns... until it all goes wrong and government bond yields rise.”
He mentioned strategic bond funds as becoming increasingly popular, as well as bond funds that aren’t tied to an index benchmark.
“Over the last five or six years we’ve seen a growth [in popularity] of short duration funds, private credit, and in funds that offer floating rate type solutions.”
Richard Ellis, financial planner at Ellis Davies, said everything in a portfolio must always be questioned.
“Our view is that everything you have in a portfolio, you have to question what is that there for,” he said.
“Arguably the role of bonds in a portfolio has always been to dampen volatility, and to protect you when markets go about their business.
“Our view is that actually, that hasn’t changed.”
He added markets will invariably turn once again in future.
“When they do, everyone will say ‘thank goodness we had bonds or cash in the portfolio’ and everyone who has run away from bonds and held something else will say ‘blimey, we should have just held some things that were not correlated to equities."
sally.hickey@ft.com
