“When inflation was still in hibernation and gilt yields were incredibly low, having enjoyed a multi-decade bull market, we were being urged by risk consultants to buy gilts due to their historical low volatility. Fortunately, we shunned that advice.
“Fast forward 24 months, and we have happily begun buying gilts across the maturity curve in order to capture a more acceptable yield. While gilts present a negative real yield at current levels of inflation, we do expect it to ease materially as the year progresses.”
At Aegon Asset Management, multi-asset investment manager Vincent McEntegart says the asset manager has been adapting its multi-asset portfolios to the new environment.
“High inflation has been very disruptive to the economy and to markets. We are experiencing a resetting of interest rates, bond markets and all asset classes.
“Our main concerns are higher inflation for longer and recession. The full impact of higher interest rates on economies has still to be seen, so we have a cautious outlook.”
While McEntegart cites a growing belief that higher interest rates are close to peaking and inflation is heading back towards target levels, he adds: “Much as we would like this scenario to play out, we are of the view that it won’t be a smooth transition.
“In broad terms we own more bonds, fewer bond alternatives and less equity risk. Allocations to cash and cash proxies are also higher.”
Higher bond yields have resulted in some capital flowing out of some alternatives and bond proxies, and into bond markets, notes McEntegart. “The rationale being if I can get 5 per cent yields in bonds, I don’t need to own as many alternatives and bond proxies.
“That said, alternatives retain an important diversification and return role in our portfolios. And if bond yields come back down in future, allocations to alternatives will likely rise again.”
At Titan Asset Management, chief investment officer John Leiper says the approach has shifted as the rate of change in inflation has shifted over the prior months.
“What started coming out of Covid as an ‘inflationary boom’ that benefited cyclical equities and commodities, has morphed into a ‘disinflationary boom’ as inflation started to roll over while the economic data proved more resilient than expected.
“This has negatively impacted equity dividend strategies, while benefiting a handful of innovative companies [for example Alphabet and Microsoft], best categorised by recent enthusiasm over artificial intelligence.”
Macmillan at Abrdn likewise says history shows that commodities and cash tend to fare relatively better during prolonged, multi-cycle periods of elevated inflation.
