The risk and return profile of fixed income has seen a profound adjustment over the last three years. For more than a decade, fixed income provided diversification, but little income. That all changed in 2022, as inflation leapt, and interest rates rises followed. This has had the happy effect of restoring fixed income’s role as a source of income. However, it also left a lingering problem for many advisers – it showed that fixed income wasn’t always as effective a diversifier as they had thought. 

The BNY Investments fixed income report  shows advisers are increasing their fixed income holdings, with 31% of advisers raising their allocation over the past 12 months. It also shows that the way advisers use fixed income is evolving, both in response to the 2022 crisis and to the higher yields available. However, it also reveals a potential mismatch between expectations and reality, with advisers struggling to evaluate fixed income effectively. 

The report suggests that advisers primarily use fixed income for risk reduction. When asked about their most important objectives, 43% of advisers cited "reducing overall portfolio volatility" as their primary goal, followed by "protecting capital in market downturns" (18%) and “offsetting equity risk" (16%) some distance behind. As one discretionary fund manager said: "Diversification is the main objective - we don't want quasi-equity risk in our fixed income portfolio." 

With the majority of advised clients falling into moderate/balanced risk categories (52%) and another 25% in defensive/cautious categories, this security effect from fixed income remains vitally important. The stability provided by this part of the portfolio can help mitigate swings in equity market performance and prevent investors making panicked decisions at the height of a crisis. Its stabilising effect can prevent poor decisions that lead to permanent impairment of capital.

However, the experience of 2022 showed that fixed income does not always fulfil this role. As interest rates rose, bond yields rose rapidly from very low levels. There was very little income buffer to absorb the capital losses that occurred. This experience has spooked some advisers, as many ‘lower-risk’ portfolios used by retired clients proved more volatile than expected. 

A shift in approach

The research, conducted by NMG Consulting for BNY Investments, suggests that the 2022 experience has prompted a rethink. Advisers are increasingly applying more rigorous due diligence to their fixed income allocation. This has manifested as a number of tactical adjustments: for example, advisers have increased diversification across bond types (25% in direct response to the 2022 sell-off, 22% under current market conditions). Advisers are also making wider use of strategic bond funds. 

Equally, as fixed income allocations increase, income is becoming a more important driver. As one adviser noted: "There are now attractive yields in the fixed income space, when we look at the returns clients are getting relative to cash." The trend is particularly pronounced among firms with retirement-focused clients, where 50% of firms with at least three-quarters of their clients retired have increased allocations in the past year, with the aim of reducing sequencing risk and preserving capital through more predictable income streams.

Evaluation problems

However, the research also exposed a wider challenge in the way advisers evaluate fixed income. In particular, it became clear during 2022 that fixed income holdings had been oriented towards diversification and growth rather than generating income and preserving capital, but not all advisers were clear what they were getting. This lack of confidence was echoed in the report. In particular, advisers rate their ability to evaluate fixed income fund manager skill at 6.6 out of 10 - the lowest score.

The results show a focus on historical performance, with track record and consistency of returns dominating selection criteria for advice firms of all sizes. This implies a backward-looking approach. The last decade has been an unusual time for fixed income, with extraordinary interest rate policy distorting markets. It is worth asking whether looking in the rear-view mirror will lead advisers to the right conclusions about the outlook for fixed income today. 

For multi-asset solutions, only 1% of advisers perceive clear and meaningful distinctions between providers' fixed income approaches, with 77% seeing some notable differences (but many similarities) and 22% seeing none at all. The view that these offerings are homogenous creates little incentive for deeper evaluation. However, the divergent performance of multi-asset funds in 2022 indicates that meaningful differences do exist.

Strategic bond funds

The research suggests this selection problem is particularly acute in the strategic bond sector. Strategic bond funds play a central role in advisers' fixed income allocations, capturing a significant 22% of direct fund allocations. Investors primarily use these funds for their agility, with 77% of advisers citing "manager's ability to navigate changing interest rate environments" as their most valued attribute, far eclipsing other considerations like diversification (38%) or geographic flexibility (31%)

Yet the 2022 market turbulence revealed significant performance dispersion among strategic bond funds that had often been obscured during the long bull market in bonds. One adviser noted, “We've seen cases where one strategic bond fund is down a couple of percent over twelve months while another is up eight percent, and these are large funds from well-known managers that on the surface should be comparable.” 

This suggests advisers may lack the tools to evaluate fixed income successfully, leading to a gap between what they expect, and what they get. One adviser said: "The data is so difficult to classify and to really see what is under the hood. We rely heavily on system providers and you are then limited by the data they get and how they categorise it." At the extremes, this may mean low and medium risk clients get a far bumpier ride than they are expecting. 

Fixed income allocation remains a work in progress for many advisers. The experience of 2022 has prompted a rethink for many on how they view the role of fixed income, but many are still struggling to evaluate fixed income funds successfully and ensure that they are fulfilling the right role in a portfolio. 

¹ Shaping Tomorrow’s Portfolios: The strategic role of fixed income.  Research conducted by NMG Consulting for BNY Investments, based on responses to surveys with 125 fixed income-focused financial advisers between March and April 2025.

For more information please visit the fixed income page here: