Sell-off in bond markets blow to 60/40 portfolio, expert warns

Over £1.3trillion has been wiped off the value of UK bonds since the beginning of the year amid a mass sell-off in the markets, according to new findings. 

Around £882.6billion has been gilts and index-linked gilts, which have fallen by 26.4 per cent and 36.2 per cent respectively in 2020, digital asset manager group Collidr said. 

The value of UK corporate bonds has also fallen by £514.5billion since the beginning of the year. 

UK bonds, have, however, rallied in recent days as market jitters subsided following the start of Rishi Sunak’s tenure as Prime Minister.  

Bonds: Over £1.3tr has been wiped off the value of UK bonds since the beginning of the year, Collidr says

Colin Leggett, investment director at Collidr, said: ‘The unprecedented meltdown in bonds is not just causing issues for pension funds with exposure to LDI (Liability Driven Investment) Strategies. The fall is also wrecking the returns for any investor with a large exposure to UK bonds.

‘Considering bonds have been a cornerstone of many “conservatively” run fund strategies, like the archetypal 60/40, many fund managers are suffering in this unprecedented unwind of UK bond positions.

‘Few individual fund managers have actually experienced a fall in the bond markets on this scale. 

‘Many may have been caught out by the speed and aggressiveness of the sell-off and some have been slow to slash the allocation to longer duration bonds.

‘With the on-going economic and political instability, we may still only be in the eye of the storm.’

Leggett said that the recent sell-off in bonds is the latest evidence that the typical 60/40 portfolio – whereby 60 per cent of a portfolio is invested in stocks and the remainder invested in bonds – for retail investors no longer offers sufficient protection against downside volatility. 

Conventionally, bonds have been viewed as a good ballast to shares. This is because while the price of shares can swing fairly wildly, bonds were believed to be steadier. But, in recent months the value of bonds has dropped as investors have taken fright over the creditworthiness of borrowers.

A year ago, the Government was paying just over 1 per cent to investors in its ten-year bonds. Today, it has to pay around 4 per cent. As yields rise, the value of bonds fall. 

Longer duration bonds, those with longer periods to maturity, are more affected by higher inflation and rising interest rates.

Leggett added: ‘Retail investors who thought having a traditional 60/40 portfolio would provide some degree of protection from a fall in the markets have had a very difficult 2022. During times of economic stress, assets can be correlated in ways that don’t fit with traditional “perceived wisdom”.

‘Many institutional investors using liability driven investing strategies weren’t prepared for such extreme market conditions. Investors always need to consider the risk that price volatility that is in excess of recent history will have on their portfolios.’

This post first appeared on Dailymail.co.uk