Allocations to bonds saw a marked increase within UK multi-asset funds in the first half of 2023, according to research from Morningstar.
In the GBP allocation 40-60% equity category, in which a typical balanced funds sits, Morningstar revealed the average weighting to bonds increased to about 40% at the end of May, up from around 30% at the start of 2022.
Over the same time period, which included bonds and equities falling in tandem in 2022, the allocation to equities fell from about 50% to 40%.
“Bonds conspicuously failed to provide diversification benefits for multi-asset portfolios in 2022,” said Tom Mills, senior analyst, manager research at Morningstar. “But after such a brutal selloff, their higher yields at least provided some cushion against further losses and a more promising starting point for managers going into 2023.”
According to Morningstar, the increase in overall bond exposure was achieve through managers adding to government bonds, however, it said rising weightings to corporate bonds played a larger part.
To illustrate this, at the start of 2022, corporate bonds made up about 44% on average of the total bond allocation, rising to 51% at the end of April 2023.
“Managers we have spoken with in 2023 have generally been constructive on investment grade credit, despite the likelihood of an economic downturn, citing that companies are fundamentally in good shape and feeling that default risk was more than compensated by wider credit spreads, on top of a higher risk-free rate adding up to a compelling yield,” said Mills.
He added managers were less positive on the outlook for high yield corporate bonds, which were generally viewed as more vulnerable in a weaker economic environment.
“While their views may differ on issues such as the likelihood or extent of a recession – or the future path of interest rates – managers on the whole see improved potential for bonds to offset equity losses in an adverse economic environment,” said Mills.
Despite recessionary fears, continued rate hikes and a US banking crisis, Morningstar said all of its GBP allocation categories produced positive returns in the first half of 2023, thanks mainly to good performance from global equities.
While fixed income markets had a more mixed half for sterling investors, with UK gilts falling 3.5%, Morningstar noted this was a much better environment for bonds than 2022, when UK gilts fell nearly 24%.