But Delic says there is still merit to the role of government bonds as a portfolio diversifier. “Their safe haven status is often valuable during short, sharp market shocks, which can dampen volatility.”
But this does not mean they reside outside a disciplined valuation process, he adds, with valuation being the “core component” of Momentum’s investment process.
“Despite the inverse relationship in recent decades, we have had zero allocation to government bonds, due to their high starting valuations. The break in that relationship has begun to create opportunities, however.
“The Momentum Diversified Income Fund has built an allocation of 4 per cent to UK gilts. If inflation remains stubbornly high, a further increase in yields could see us increase the position further.”
Besides equities and bonds, one of the features of multi-asset investing is that diversification can be derived from elsewhere.
“As well as equities and bonds, our portfolios also use other investments which have maintained their negative correlation to other assets,” says Dean Cook, a multi-asset portfolio manager at Aviva Investors.
“This could include relative value strategies, which don’t rely on markets trending in one direction or another, but instead exploit how one group of assets might perform relative to another. This could be at the level of sectors, regions or even style factors like value and growth.”
Cook adds that given central banks such as the Federal Reserve are nearer the end of the hiking cycle than the beginning, the asset manager expects certain parts of the yield curve are less likely to exhibit positive correlation with equities over the nearer term.
In June, the federal funds rate was held at a target range between 5 per cent and 5.25 per cent. But Fed chair Jerome Powell also said that nearly all committee participants viewed it as likely that some further rate increases would be appropriate this year.
“Long-duration bonds currently trade with a greater relationship to economic growth expectations than they do inflation expectations, which reduces their correlation with equities,” Cook says.
“Over the shorter term, a positive correlation might reassert itself, having gone negative in May 2022, and may mean we have to accept that our portfolios deliver moderately higher volatility than we would otherwise expect.”
Chloe Cheung is a senior features writer at FTAdviser
