Despite concerns about volatility and increased correlations with equities, advisers are increasing their exposure to the asset class. Firms have not only increased allocations to bonds over the past 12 months, they expect to continue doing so over the next year.

• 31% of advisers have increased bond allocations by more than 5% in the past 12 months, with only 7% decreasing them by more than this amount.
• Advisers are nearly 5 times more likely to increase fixed income exposure over the next year than they are to reduce it.
• The interest rate outlook is the main driver for these increased allocations, cited by 55%

An overwhelming majority of advisers see the key objective of fixed income as reducing overall portfolio volatility. Other objectives such as generating income and protecting capital ranked much lower despite the importance of these goals to many advised clients.

• 43% said reducing overall portfolio volatility was the single most important objective for allocating to fixed income.
• Only 16% cited offsetting equity market risk and 18% chose protecting capital in market downturns as most important.
• The importance of fixed income to generate income is limited with only 10% of advisers choosing this as the most important objective.

Advisers who prefer active strategies recognise the potential to outperform in less efficient markets and the flexibility active investment offers.  

• 64% of advised fixed income assets are held in actively managed strategies.
• The main driver for this is the potential for outperformance in less efficient markets, identified by 63% of firms.
• Other key drivers are the flexibility to adjust to changing market conditions (49%) and the ability to manage interest rate/duration risk (39%).

Nearly a quarter of advised fixed income assets are allocated to strategic bond funds. Those who use them overwhelmingly cite the ability to navigate changing interest rate environments as a valuable characteristic of these funds. Our research suggests a risk managed approach is preferred by advisers.

• Strategic bond funds account for 22% of advised fixed income assets ahead of UK government bond funds (17%) and UK investment grade corporate bonds (16%).
• 77% of advisers cited the ability to navigate changing interest rates as a valued characteristic of these funds with one-stop diversification (38%) also highly valued.
• Risk concentration if the manager view is incorrect (43%) and fund manager dependency (37%) are the most cited concerns with strategic bond funds.

Performance track record and consistency of returns are the main drivers of fund selection with cost coming a close third. Larger firms tend to weight track record and cost over consistency but also place greater weight on risk-adjusted returns than smaller firms.

• 83% of larger firms (AUA>£250m) say performance track record is the most important factor when selecting bond funds with cost (71%) and consistency of returns (63%) also very important.
• Smaller firms put consistency of returns (70%) ahead of both track record (68%) and cost (62%).
• Risk-adjusted performance was ranked more highly by larger firms with 42% saying this was an important factor compared to only 23% of small firms.

Advisers are generally confident that they understand the different types of fixed income securities and how they are impacted by interest rate sensitivity and duration. However, firms are less confident when evaluating managers or how different strategies could be implemented across the market cycle.

• On average, advisers scored themselves 8 out of 10 for their understanding of the different types of fixed income security.
• Advisers were least confident about evaluating fund manager skill and approach giving themselves an average score of 6.6 out of 10.

The role of fixed income for clients in retirement was seen as a key driver of the need for innovation in fixed income. Generating predictable income, preserving capital and protecting against inflation are all seen as important developments.

• Around 60% of advised clients are either phasing into retirement (18%) or are already in retirement (41%).
• The ability to generate a reasonable yield while preserving capital and providing inflation protection were seen as equally important innovations with 42% of firms citing these.
• Secure income solutions with predictable cashflows would be valued by a third of respondents.

Current market conditions and the bond sell-off in 2022 have both caused adviser to reexamine how they access fixed income. Both have driven advisers towards increasing the diversification of the types of bonds held and making greater use of strategic bond funds.

• The current market environment is leading some advisers to make greater use of active management (21%) and to conduct more frequent portfolio reviews (18%).
• 25% of advisers said the 2022 sell-off had led them to increase diversification across types of bonds with 22% saying they were making greater use of strategic bond funds.
• The events of 2022 also drove greater use of short-term bonds (22%), a reduction in bond allocations (16%) and greater use of alternatives (14%).
•  Around a third of advisers said 2022 and current market conditions have led to no significant change in approach.