Bonds are no longer the defensive foil to equities in a multi-asset portfolio.

Matthew Yeates, Head of Alternatives and Quantitative Strategy at 7IM, recalls how he watched government bonds falling in value alongside equities during the March sell-off. This was not the way a traditionally balanced portfolio was meant to work. (FT)

But investors are suffering a double whammy from bonds, observes Yeates.

Poor diversification and nil (or negative) income

“As well as being expected to rise when equities fall, investors in bonds historically could have relied on a yield income as an extra layer of defense,” he comments. “Given market movements over the last few months and years though, investors in most UK government bonds (Gilts) now receive hardly any income at all.”

Worse, in some situations, investors have to pay the UK government for the honor of lending them money, Yeates comments wryly.

7IM: Alternatives are part of the answer

Unless they take action, investors now face lower returns for uncertainly longer terms.

“Carefully considered alternatives offer the most sensible way to invest, rather than continuing to rely solely on bonds for their diversification,” advises Yeates.

Though alternative investments are a vast category, investors cannot ignore some of the downsides. These include illiquidity, complexity, and high fees.

However, 7IM can identify alternative assets that can provide the diversification qualities that bonds no longer do. However, they would not suffer the disadvantages above.

7IM’s alternative strategies

7IM’s alternative investments include real estate investment trusts (REITs) that offer investors exposure to the global property cycle. The REITs also offer the advantages of diversification, liquidity, and growth.

Besides, 7IM offers a mix of various liquid alternative strategies. These generate above-inflation returns and lace a portfolio with defensive qualities.

One such strategy that 7IM used with telling effect was a commodity “long-short” strategy that paid off in spades when oil prices suddenly crashed to negative.

The strategy earned nearly 30% in the first quarter of 2020.

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