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£150bn wiped off the value of Gilts since the start of 2022, the biggest fall in over 30 years

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  • Biggest percentage fall in UK Government bonds since 1980s
  • Sell-off in bond market could mean “another nail in the coffin” for the traditional 60/40 portfolio solution 

Around £150bn has been wiped off the value of Gilts (UK government bonds) since the start of the year, as investors focus on rising interest rates, says Collidr, the digital asset manager.

Since 1 January to the of end April, Gilts have fallen by 10%, the biggest drop since the 1980s, compared to a fall of 6% over the same period for the FTSE World Equity Index.

As well as underperforming shares, Gilts have also been more volatile than shares.  Since January 1, Gilts have had a drawdown of 11.25% (i.e. peak to trough fall) versus a drawdown of 11% for shares (FTSE World Equity Index).

This has been a major challenge for many investors as they hold Gilts for defensive purposes, on the assumption that they will be more stable than shares.

Challenge to concept of 60/40 portfolio

Symon Stickney, CEO of Collidr, says that this collapse in bond prices has put “another nail in the coffin” to the traditional, static 60/40 portfolio solution that many fund managers have developed for retail investors. The 60/40 strategy is based on the principle that the 40% weighting in bonds will reduce the risks and volatility of the overall portfolio. However, bonds prices have become so overstretched that they have been vulnerable to rising inflation and rising central bank rates.

There has also been a misconception that bond prices and the price of shares were uncorrelated, which led investors to believe that if shares fell then the bond element of their portfolio would offer a partial hedge against that fall. Instead this year has seen shares and bonds fall in tandem.

Collidr says the sell-off in bonds is the latest evidence that the 60/40 concept is too blunt a tool for investors. Investors need to look at alternative asset classes to bonds if they want true diversification, Collidr adds. At the moment, diversifiers might include strategies like long/short equity, market neutral funds, currency trading and assets like commodities, oil and real assets. Investors should also be looking at large cap quality companies with brands that customers can’t live without – those are the kinds of businesses that should perform better as rates rise and have the pricing power to help offset the impact of inflation.

Symon Stickney, CEO of Collidr, says: “For investors looking to offset the volatility of equities, bonds are not the answer at this point in time.”

“The sell-off in the bond markets is causing big challenges to fund managers. Few individual fund managers have actually worked through a fall in the bond markets of this scale.”

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