The Bank of New York Mellon Corporation (“BNY”) (NYSE: BK), today announces new research from BNY Investments which reveals how UK financial advisers are deploying fixed income investments both to protect client portfolios and drive returns, against an increasingly complex market backdrop.
Interest rates driving changes to allocations
Market swings, notably tariff driven volatility and 2022’s bond sell-off, undoubtably created an uncertain backdrop for advisers allocating to fixed income. However, findings reveal increased confidence in the asset class, showing advisers have increased their allocations to fixed income over the past twelve months. The outlook for interest rates was cited as the primary factor for these changes (55%), followed by inflation expectations (43%) and the relative value of bonds against other asset classes (42%).
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. Advisers also stated that they anticipate increasing allocations further in the year ahead.
Weathering volatility with strategic bond funds
Increased use of strategic bond funds proved to be the most popular approach to navigate market instability, with nearly a quarter of advisers increasing strategic bond fund allocations in a response to notable market swings. Over three quarters (77%) highlighted the primary point of attraction was the flexibility these funds provide in navigating shifting interest rate dynamics. Over a third of advisers (38%) 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 selecting strategic bond funds stated their main concern was risk concentration if the manager’s view is incorrect (43%). This indicates advisers require solutions that can navigate changing markets without taking on excessive risk, instead generating controlled incremental returns.
Capturing the benefits of institutional approaches
When asked what institutional approaches could be valuable for retail clients, over a third of advisers stated outcome-oriented portfolio construction techniques (37%) and having access to fixed income markets typically restricted to institutions (36%). This indicates advisers are increasingly recognizing the value of institutional methods, such as using liability matching techniques as a decumulation tool for clients approaching, and in, retirement.
“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”, said Michael Beveridge, UK Head of Intermediary Distribution at BNY Investments.
Beveridge added: “At BNY Investments, we focus on bringing institutional discipline to retail fixed income management. Through Insight Investment our fixed income investment platform, advisers can get what they clearly need – an investment process that focuses on the delivery of incremental returns through thoughtful risk management, a process increasingly critical in today’s market environment.”
“As a leading institutional investment manager, Insight offers transparent and repeatable investment processes with carefully controlled risk exposures”, said Peter Bentley, Global Head of Fixed Income at Insight Investment. “Combined with our specialist expertise and established track record, all of these features can support fixed income solutions for retail investors with clear goals, including retirement income”.
