Bonds falling even further than shares this year shows that the traditional 60/40 portfolio does not fulfil its purpose anymore.
This is the view of digital asset manager Collidr.
Its investment director Colin Leggett warned that the continued sell-off in bonds is the latest evidence that the 60/40 portfolio for retail investors no longer offers sufficient protection against downside volatility.
Collidr said that the inverse correlation of bond prices and price of shares is a misconception.
This leads investors to believe that if shares fall, then the bond element of their portfolio will hedge their portfolio against that fall.
Leggett said: “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’.”
However, institutional investors have also been caught off-guard.
Leggett added: “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.”
Research by Collidr found that over £1.3trn has been wiped off the value of UK bonds since the start of 2022. It is the result of the major sell-off across bond markets.
The value of gilts and index-linked gilts has also lost £882.6bn. They fell respectively 26.4% and 36.2% in the year to date.
UK corporate bonds have also fallen by £514.5bn in value since the beginning of the year.
Leggett 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.”