Wealth Management
Iain Ramsey, Chief Investment Officer, AHR Private Wealth
Safe haven bonds in an inflationary environment In the current climate, the merits of holding traditional ‘safe haven’ bonds seem few and far between. Increasing but albeit still relatively low yields, alongside recent volatility similar to equity markets make the trade a very difficult one and has investors questioning their traditional investment approach and asset allocation.
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hen also factoring in the spread between bond yields and equity earnings yields, the trade looks even less compelling. However, what is important for investors to consider is what are the main drivers of including these safe haven assets in the first place? Often their inclusion is done so to add protection against equity market volatility and to ensure that at times of market stress the whole portfolio is not correlated to equity markets. Of course, on top of this, there is the steady flow of income these assets can provide (although despite recent moves this still looks relatively unappealing).
and higher inflation are worth less to an investor today due to the uncertainty of the market and growth equities have been sold off the most as a result of their price being based on their predicted future cash flows. Additionally, the income provided by government bonds is also worth less to investors today.
of war in Ukraine, it took longer for safe haven bonds to show the effects of inflation. With this in mind, investors should be considerate when holding safe haven bonds and not act in the same way as they might have done before but consider allocating them as a more reliable bond in market shocks.
Understanding this dynamic gives investors insight as to why their traditional asset approach may currently be struggling and the prompt to consider what action they should take. Certainly, it would be neglectful to ignore this dynamic and maintain the traditional approach on the premise it has worked previously.
However, one of the biggest hurdles to this flexibility across asset allocation has been and is, the use of passive investment vehicles and their advocation of traditional asset splits between traditional equity and traditional fixed income.
High inflation and rising interest rates have created an ideal scenario for traditional asset class holders enabling both their equity and fixed-income holdings to sell. As both equity and fixed income holdings are being sold off at the same time, the reasoning as to why points to the duration of these assets.
Relying on safe haven assets in market uncertainty
Equities with a higher risk-free interest rate 34
Safe haven bonds remain an attractive asset during market shocks caused by conflict, the pandemic or recession as they tend to stay relatively consistent and are affected by event with a delay. In recent times of world distress, such as the initial outbreak of Covid 19 and the onset
Many investors will find themselves with a split of low-cost equity ETFs and low-cost Fixed Income ETFs. This approach has worked well and may continue to do so over the longer term, however it is important for investors to understand what they own, in particular within the fixed income space. In a traditional global equity ETF, the vehicle will buy shares weighted to the market capitalisation of the companies within its index. Over the long term this should lead to the vehicle buying more
