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Let's celebrate boring bonds

Fixed income is no place for thrills
August 26, 2021

A recent chat with an exchange-traded fund (ETF) specialist gave me the impression that we are unlikely to see 'thematic' portfolios sweep through the bond space as they have done on the equity front. This makes some sense. As they put it, those individuals buying thematic equity funds are likely hoping for the impressive returns that promising shares can sometimes deliver. Bonds tend not to carry the same level of risk or reward, in theory.

It means that many bonds will continue to find themselves written off by certain investors as dull, grey and uninspiring. Even those bonds that do fit in with some pressing themes such as environmental, social and governance (ESG) investing tend not to look glamorous. Some of the most successful ethical bond funds have a big weighting to financials rather than newer sectors.

In a world of thematic investing, crypto, volatile 'meme' stocks and increasingly esoteric alternative asset classes such as music royalties, the likes of an investment grade bond may therefore look pretty dull. But perhaps this should be celebrated.

While emerging assets and new investment themes can be hard to properly assess, it would be good if bonds could simply continue to perform their traditional roles in portfolios. In the case of government and investment-grade debt, that means diversification at times of stock market stress. While investors have long worried about the likes of gilts and Treasuries losing their buffer effect, that has held up so far. Long may it last.