Why bonds may not be the safe haven they once were
“De-risking” by shifting your portfolio into bonds used to make sense. But not so much any more, says Merryn Somerset Webb. So what should you do instead?


If you want to cut the risk in your portfolio, what should you do? Look at the recent discussion over how defined benefit (DB) pension schemes should be funded, and you’ll get a good sense of the group-think on the topic. As far as most people – and the UK government – are concerned, if you want to “de-risk” so as to be sure of meeting your long-term pension obligations, you have to shift into bonds, and in the UK, into gilts. That made sense when you could expect bond returns to be positive in nominal and inflation-adjusted terms. It explains why around 70% of private DB assets are in long-term bonds, and why 75% of those are gilts. It also explains why individuals near retirement are encouraged to shift from the standard portfolio mix of 60% equities and 40% bonds, to more like 100% bonds.
But does it really make sense now, or has the long-term shift in bond yields from something to nothing over the last 30-odd years changed the relative risk profiles of asset classes? Is de-risking into gilts really pretty risky? That would certainly be true if inflation takes off into 2022 (see page 4, and note that Joe Biden’s stimulus plan is likely to be huge) and if interest rates lagged inflation as that happened (which they will – governments hold too much debt to allow government bond yields to pop higher). Who would want to hold assets guaranteed to lose at least a couple of percentage points of real value a year? And who would hold them as part of a low-risk strategy? It might work for the government for us all to think that bonds are low risk (they have a lot to sell) but it’s hard to argue that, barring a whopping new deflationary recession, it works very well for the rest of us.
Yet stating that bonds aren’t much of a safe haven isn’t much use if you can’t name another (beyond gold!). Our answer is much as it usually is: we should perhaps define long-term safe havens less in terms of historic norms and more in terms of actual value – or in these days of everything being over-priced, relative value. I’m quite taken with the idea that tech stocks have become something of a Covid-19-era recession hedge: if anything goes wrong and we end up back at Covid-19 square one, it will be America’s big tech stocks that win again. But it is too much for us to define any sector on record-high valuations as in any way safe (the US is on a cyclically-adjusted price/earnings (p/e) ratio of well over 30).
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That brings us back to the UK. In the relentless negativity of the last few years. It’s easy to forget that we got a perfectly reasonable Brexit deal through in a year (please don’t write to us about the teething problems until it is clear that they are more than that) and are in the middle of rolling out a pretty good (by global standards) vaccine programme that will hopefully return us to our old normal in the next few months.
Our markets are also getting more whizzy: the FTSE 100, long one of the world’s dullest markets, is about to get a sprinkling of tech fairy dust and as Jonathan Compton notes in this week's issue, we are no slouches in the booze and fizzy drink department either (I accept not everyone thinks this is a good thing). Finally, of all the main markets, it is probably the least overpriced relative to history. It is very far from perfect (a forward p/e of 15 vs a 15-year median of 12, says Duncan Lamont of Schroders). But right now, if you are looking to invest in the UK, it’s probably a better long-term bet than the bond markets – or cash for that matter.
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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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