Prepping portfolios for next market storm? Not just gold and govvies

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G7 government bonds? Check. Gold? Check. But that may not be enough as the coronavirus crisis accelerates a hunt for a wider pool of assets to better balance investment portfolios during stressful times.

Corporate and Chinese government debt are among alternatives being explored by multi-asset portfolio managers with mandates to invest across sectors, currencies and countries.

It’s been a moot point for years now whether U.S., Japanese and German bonds can adequately offset equity volatility. Given how relentlessly yields have fallen, many fear these bonds can no longer rally much when stocks fall – effectively losing the inverse correlation that made them a valuable defensive asset.

In fact Treasuries’ hefty rally in the recent crisis showed their safe-haven credentials remain intact. And U.S., German and other developed government bonds will always have a role as portfolio ballast, backed by conviction that these debts will never face default and can easily be bought or sold.

But the crisis has shown that even the safest of assets can succumb to panic — as global stocks tumbled during the volatile March 9-19 period, 10-year U.S. and German bond prices slid 9% and 7% respectively.

Compare that to Bunds’ 10% price rally during the worst of the 2011 euro debt crisis between end-May and early-August.

“We do have a sense that things are shifting,” said Wouter Sturkenboom, who helps to formulate investment strategy for $350 billion in client assets at Northern Trust Asset Management.

He has reallocated 7% of his equity portfolio towards U.S. corporate debt, inflation-linked bonds and cash, instead of government debt as he would have done earlier.

“You can’t just rely on (government bonds) in this environment, you need to go through the whole risk-control bucket,” Sturkenboom added.

Similarly, Gavin Counsell, a multi-asset fund manager at Allianz Global Investors, said he had roughly halved exposure to UK gilts since early March and favours precious metals.

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