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Loosening bonds
As bond investors face persistent structural headwinds , accessing the asset class as cheaply as possible – certainly in the more mainstream sub-sectors – looks like a sensible option , a trend which is being reflected by inflows . At the end of 2017 , just shy of £ 195m was held in passive fixed income assets in the UK . This has since grown to more than £ 9bn , according to Calastone ’ s Fund Flow Index . The data shows a rate of cumulative growth akin to that of passive equity investing . But having moved in the opposite direction to equities for decades , this year saw bonds ’ role as a diversifier called into question as the performance of the two asset classes became largely correlated . Consensus is suggesting the tide may now be turning , as rising inflation has led to a shift in monetary policy that signals yields may start to move towards more attractive levels , while equity volatility looks set to remain high for the foreseeable future . Edward Park , chief investment officer at Brooks Macdonald , expects fixed income to start playing a greater role in balanced portfolios . “ With investors concerned about recessionary risks , sovereign bonds are able to provide some protection against downgrades to economic growth , as an increased probability of a recession would likely lead to investors reducing their interest rate forecasts for central banks , causing bond prices to rise .”
Choosing your battles But is passive the right way to execute such a re-entry ? The answer depends on where in the bond market you ’ re looking . Park cautions over the risks that come with rigidly following a benchmark , particularly at the higher-
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