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Update

A research report by Collidr Asset Management has found that, by late October, more than £1.3trn had been erased from the value of UK bonds since the start of 2022 following a major sell-off across bond markets. Gilts and index-linked gilts have fallen 26.4% and 36.2% respectively in the year to date, losing £882.6bn in value, while the value of UK corporate bonds dropped by £514.5bn during the same period. 

Collidr investment director Colin Leggett said ‘The unprecedented meltdown in bonds is not just causing issues for pension funds with exposure to LDI strategies. It is also wrecking the returns for any investor with a large exposure to UK bonds.’ Given that bonds have been a cornerstone of many ‘conservatively’ run fund strategies, like the archetypal 60/40, he said, many fund managers are ‘suffering in this unprecedented unwind of UK bond positions’.

‘Few individual fund managers actually experienced a fall in the bond markets on this scale,’ Leggett continued. ‘Many may have been caught out by the speed and aggressiveness of the sell-off. Some have been slow to slash the allocation to longer duration bonds.’ He also noted that the continued sell-off in bonds suggests that the typical 60/40 portfolio for retail investors ‘no longer offers sufficient protection against downside volatility’.

There has long been a ‘misconception’ that bond prices and the price of shares are inversely correlated, the report argued. This has led investors to believe that if shares fell then the bond element of their portfolio would offer a partial hedge against that. Instead, this year bonds have fallen even further than shares.

‘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,’ Leggett said. ‘During times of economic stress, assets can be correlated in ways that do not fit with traditional ‘perceived wisdom’. Many institutional investors using liability-driven investing strategies were not prepared for such extreme market conditions. Investors always need to consider the risk that price volatility in excess of recent history will have on their portfolios.’

Links: https://www.investmentweek.co.uk/news/4058920/uk-bonds-gbp-3trn-drop-value-start-2022