UK financial advisers have increased their allocations to fixed income over the past 12 months, but remain mindful of implementation risk, analysis from BNY Investments has found.

Its report noted that advisers were deploying fixed income investments to protect client portfolios and drive returns against an increasingly complex market environment.

While market swings had created an uncertain backdrop for advisers allocating to fixed income, BNY Investments’ findings showed an increased confidence in the asset class, with advisers having increased allocations to fixed income over the past 12 months.

The outlook for interest rates was cited by 55 per cent of advisers as a factor behind these changes, while 43 per cent pointed to inflation expectations and 42 per cent cited the relative value of bonds against other asset classes.

Almost a quarter of advisers had increased their diversification across different bond types in response to market swings as a means of hedging the risk.

Advisers also stated that they expected to increase allocations further in the year ahead.

An increase in the use of strategic bond funds was the most popular approach to navigating market instability, with almost a quarter of advisers using strategic bond fund allocations in response to market swings.

More than three quarters (77 per cent) said the primary point of attraction was the flexibility provided by these funds in traversing shifting interest rate dynamics.

Over a third (38 per cent) valued the ability of the strategic bond approach to provide one-stop diversification, preferential to making separate allocations to underlying sub-asset classes.

However, advisers also recognised the potential risks of these strategies, with 43 per cent of those selecting strategic bond funds stating their main concern was risk concentration if the manager’s view is incorrect.

BNY Investments said this indicated that advisers required solutions that can navigate changing markets without taking on excessive risk, instead generating controlled incremental returns.

“Advisers remain understandably cautious about fixed income, yet it’s evident they recognise the opportunities in bonds as current yields approach the returns we might normally expect from equities,” commented BNY Investments UK head of intermediary distribution, Michael Beveridge.

“At BNY Investments, we focus on bringing institutional discipline to retail fixed income management. Through Insight Investment, our fixed income investment platform, advisers can get what they clearly need – an investment process that focuses on the delivery of incremental returns through thoughtful risk management, a process increasingly critical in today’s market environment.”

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