UK bonds have seen their value fall by £1.3bn since the start of 2022
Gilts and pegged gilts have fallen 26.4% and 36.2% respectively since the start of the year, losing £882.6 billion in value, as the value of UK corporate bonds fell 514 £.5 billion over the same period.
Colin Leggett, Chief Investment Officer at Collidr, said: “The unprecedented bond slump is not just causing problems for pension funds exposed to LDI strategies. The fall is also destroying returns for any investor with significant exposure to UK bonds. “
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Considering that bonds have been the cornerstone of many “conservatively” managed fund strategies, such as the 60/40 archetype, Leggett said many fund managers are “suffering from this unprecedented unwinding of UK bond positions”. .
“Few individual fund managers have actually experienced a fall in bond markets of this magnitude. Many may have been caught off guard by the speed and aggressiveness of the sell-off and some were slow to reduce allocation longer duration bonds,” he said. said.
Leggett added that the continued bond selling is the latest evidence that the typical 60/40 portfolio for retail investors “no longer provides sufficient protection against downside volatility.”
There has long been a “misconception” among some that bond prices and stock prices are inversely correlated, the report reads.
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This led investors to believe that if equities fell, the bond component of their portfolio would provide a partial hedge against that fall. Instead, this year bonds have fallen even more than stocks.
“Retail investors who thought having a traditional 60/40 portfolio would provide some degree of protection against a market downturn have had a very difficult year in 2022. In times of economic stress, assets can be correlated in ways that does not correspond to traditional ‘perceived wisdom’, said Leggett.
“Many institutional investors using liability-driven investment strategies were unprepared for such extreme market conditions. Investors should always consider the risk that higher price volatility than recent history will have on their wallets.”