Since the start of 2022, UK bond values have plummeted. In October this year, digital asset management firm Collidr revealed data showing that UK bond values had fallen in value by over £1.3trn since the start of 2022.
But what does this mean for investors?
Bad news for the 60/40 portfolio…
The idea of a 60/40 portfolio has long been the standard for many investors. It’s a simple way to build a portfolio – but it may not be suitable for everyone.
Here, an investor allocates 60% of their funds to shares, and the remaining 40% to bonds. The idea is that it keeps a portfolio relatively stable even when times are volatile – the 40% allocated to bonds will, in theory, help to moderate the risks involved in your shareholdings.
However, 2022 has proven that bond holdings do not always hedge a portfolio against a fall in share prices. Collidr themselves have stated that this year’s UK bond performance is evidence that the 60/40 portfolio make-up may no longer be enough to protect investors against volatility.
The effect on liability-driven investments
In October, we wrote about how September’s mini-Budget threatened to bankrupt UK pension funds. Part of the reason behind this was the increase in gilt yields that resulted from the Government’s announcements.
Gilt and index-linked gilt values have fallen, say Collidr, by £882.6bn this year. For institutional investors who have a large exposure to liability-driven investment strategies, this has been bad news.
But what’s next? Investment markets can always be unpredictable – especially during times of economic uncertainty. Say Collidr, “we may still only be in the eye of the storm”.
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