Despite dynamically repositioning the portfolio because of a poor outlook on bonds, the asset class has astounded Vision Super this past week.
Since Trump’s win of the US presidential election, an estimated $US1 trillion ($1.33 trillion) has been wiped off global bond markets as yields have continued to rise.
Prior to the vote, Vision Super had just 7 per cent of its default balanced portfolio invested in bonds (primarily through State Street Global Advisers’ Australian and international passive fixed interest fund), notably less than its long-term equilibrium strategic asset allocation of 12 per cent.
“Our view is that fat tail risk on both sides has increased, so for us diversification has been a real focus,” Vision Super chief investment officer Michael Wyrsch said.
‘Fat tail risk’ describes the chance of returns being severely crunched.
Prior to the UK’s vote to leave the European Union in June of this year – another geopolitical event that significantly affected yields – Wyrsch felt that bonds had probably peaked in terms of value and needed to be diversified away from.
“That’s not a view I had in the middle of last year – not that I thought that bonds were great value back then. But we felt that because of the negative interest rate and policy experiments that bonds had probably done their dash,” Wyrsch said, explaining why the allocation has dropped 3 per cent over the past two years.
Even with the pessimistic outlook, he described what has happened with bonds in the past week as “astounding”.
Yields have increased sharply, with US 10-year yield now up 43 basis points over the past month. For Australian bonds, the 10-year yield hit 2.737 per cent on Tuesday – the highest it has been since January.
US government bonds have also sold off aggressively in anticipation of higher inflation from policies to come from the US President-elect.
BlackRock cautioned against some common misconceptions among investors. It warned that bonds and equities were more correlated today than in the past, and as such, investors must not assume that rates will always rally when risk assets are hurt.