The role of corporate bonds in a 60/40 portfolio is a challenge for investors, according to the latest FTAdviser poll for Talking Point.
When asked “what role do you see for corporate bonds in a 60/40 portfolio?”, 44.2 per cent of advisers said they saw no change in the role of corporate bonds, whereas 39.6 per cent said they saw an increasing role for this type of asset.
One sixth (16.3 per cent) said they saw a decreasing role for corporate bonds.
David Coombs, head of multi-asset investments at Rathbones, said: “The definition of corporate bonds is very wide. In essence, we see bonds rated A+ and above as a strategic asset class for the 40 per cent allocation, but clearly supplementary to government bonds due to the higher liquidity risk.
“Bonds below that rating we see as a tactical asset class in the 60 per cent allocation, given the higher correlation of this group with equities in stressed markets. Therefore, the expected risk/return picture for this cohort of credit has to challenge equities to find a role in the strategy.
“This has been relatively rare and only really been material in 2009 and 2022 for us, as during these periods spreads widened and this exposure temporarily became a more efficient use of capital.”
Coombs added he saw no reason for the role of corporate bonds in a 60/40 portfolio to change, as liquidity in corporate bond markets continued to deteriorate rather than improve.
He added: “I think this is partly due to the reduction in exposure to equities by UK institutional investors in favour of bonds due to structural changes caused, in part, by regulations and the closure of defined benefit pension schemes to new joiners.
“In our funds, as noted above, credit has seldom been an efficient use of our equity risk capital and so we’ll remain tactical and opportunistic in credit.”
Philip Dragoumis, director and owner at Thera Wealth Management, said he avoided corporate bonds where possible, preferring to use equities as the primary risky growth drivers in his portfolios.
He added: “The role of bonds in a portfolio is to provide: 1) a guaranteed yield and hence some certainty of long-term returns; 2) a hedge in periods of intense market stress as they tend to be negatively correlated to equities; and 3) a source of some stability (although this past year has put this to the test) in case clients need to sell down a portion of their portfolio for spending purposes.
“Highly rated government bonds serve this purpose. Corporate bonds unfortunately do not, as they come with extra risks attached, such as spread widening or default risk.
“We tend therefore to avoid them where possible and prefer to use equities as the primary risky growth drivers in our portfolios.”