Pension funds, insurers, family offices and wealth managers expect bonds and equities correlation will turn increasingly negative

New research from Managing Partners Group (MPG), the international asset management company, shows institutional investors and wealth managers expect the correlation between bonds and equities to turn increasingly negative over the next 12 months.

The study with institutional investors and wealth managers holding assets of €107 billion under management found 43% believe the recent positive correlation between the two asset classes with both falling and rising together will reverse.

Around one in three (31%) questioned in the research by MPG, which runs the Melius Fixed Income Fund, said they expect the correlation to become increasingly positive while 24% believe it will not change and 2% were undecided.

Fears of recession in major economies is however driving increased interest in adding longer duration core fixed income assets which offer the combination of portfolio diversification, an attractive yield and capital appreciation.

Around 69% questioned expect allocations to longer duration core fixed income assets to increase over the next 12 months with just 29% expecting allocations to be unchanged and 2% undecided.

US investment grade corporate bonds and UK Government bonds are the fixed income asset classes currently most selected among the top five in this sector for the most attractive risk and return profiles, as the table below shows. Swiss Government bonds, EU Government bonds and UK investment grade corporate bonds are also highly rated.

MPG’s study found that professional investors believe that credit ratings and downgrades are more likely to align with historical trends rather than surpass them as the global economy slows down due to companies generally having more robust balance sheets.

Around 90% questioned agree that credit ratings and downgrades will be in line with historical trends while just 9% disagree and 1% are unsure.

MPG has added life settlements to its Melius Fixed Income Fund, which invests in corporate and high yield bonds, targeting up to an equal split between l

Life Settlements and other assets. Life Settlements are US-issued life insurance policies that have been sold by the original owner at a discount to their future maturity value. 

They have little or no correlation to equites and bonds. MPG says aalternative asset classes in general are set to benefit from increased diversification as investors look for reasonable returns while equities are set for a tough year ahead.

Jeremy Leach, Chief Executive Officer at MPG, said: “There have been signs that the recent positive correlation between bonds and equities is going into reverse and that is a trend that investors expect to continue over the next 12 months.

“Concerns that the global economy is heading for recession remain and that is driving a switch to longer duration core fixed income but at the same time there is less concern about credit ratings and downgrades due to relatively robust corporate balance sheets if the economy does slow down.”

MPG’s Melius Fixed Income Fund has returned 7.72% in the 12 months to January 2024 outperforming the iShares Core US Aggregate Bond benchmark by 5.39% over the period, benefiting from an exposure to fixed income in the USA, UK, Europe and Switzerland. Melius has a yield driven investment strategy that carries less pricing sensitivity to interest rate movements.