Advisers are using fixed income investments both to protect client portfolios and drive returns amid market volatility, new research from BNY Investments has found.
The firm said market swings, fuelled by tariff uncertainty and 2022’s bond sell-off, have created an uncertain backdrop for advisers allocated to fixed income. Despite this, the research shows increased confidence in the asset class, with advisers increasing their allocations to fixed income over the past 12 months.
The outlook for interest rates was cited as the primary driver for these changes (55%), followed by inflation expectations (43%) and the relative value of bonds against other asset classes (42%).
BNY Investments said that in response to significant market swings, almost a quarter of advisers increased their diversification across different bond types as a means of hedging the risk, with advisers also expecting to increase allocations further in the year ahead.
Increased use of strategic bond funds proved to be the most popular approach, with nearly a quarter of advisers increasing strategic bond fund allocations as a result of market volatility. Over three quarters (77%) said the primary attraction was the flexibility these funds provide in navigating shifting interest rate dynamics. In addition, more than a third (38%) of advisers value the ability of the strategic bond approach to provide one-stop diversification, preferential to making separate allocations to underlying sub-asset classes.
However, advisers recognise that these strategies may carry risks. Nearly half of advisers (43%) selecting strategic bond funds said their main concern was risk concentration if the manager’s view is incorrect.
When asked what institutional approaches could be valuable for retail clients, over a third (37%) of advisers stated outcome-oriented portfolio construction techniques and having access to fixed income markets typically restricted to institutions (36%).
Michael Beveridge, UK head of intermediary distribution at BNY Investments, said: “Advisers remain understandably cautious about fixed income, yet it’s evident they recognise the opportunities in bonds as current yields approach the returns we might normally expect from equities.
