Finding Defensive Assets in a Low Yield World

Even with yields at record lows, it is difficult to ignore history and the humble government bond remains one of the better sources of diversification

Mark Preskett 22 July, 2016 | 10:00AM
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With sovereign bond yields back down to record lows, it again casts the spotlight on how to invest for a defensive client. Should advisers be allocating a large proportion of assets into gilts and cash while locking clients into negative real yields in the process? What should be classified as a defensive asset in this low yield world? This is a question we at Morningstar’s investment management group have been wrestling with for some time.

As a result of the low yields on offer, we’ve been running an underweight fixed income stance throughout 2015 and 2016, raising cash levels and favouring alternatives within our discretionary portfolios. However, we’ve stopped short of selling all government bonds and we continue to recommend investing a portion of client assets in fixed income funds.

Indeed, for our lower risk clients, bonds still make up the bulk of our recommended allocation. For some asset allocators outside Morningstar though, the answer has been to aggressively move their portfolios out of fixed income markets and into alternatives.

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Mark Preskett  is a Senior Investment Consultant & Portfolio Manager for Morningstar UK                       

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