Will bonds bail you out next time?

While this is often the case in practice, the long-term experience tells us that the nature of the relationship is intricate and fluctuates over different time periods. As discussed in this article by David Scobie, head of consulting at Mercer, investors should consider how portfolios might be constructed to withstand an environment where the diversifying power of bonds may not "ride to the rescue".

“Understanding and anticipating the power of correlation - and thus the limitations of diversification - is a principal aspect of risk control and portfolio management.” – Howard Marks, Oaktree Capital

Amid highly accommodative global monetary policy, most of the past decade has proven to be a happy time for commonly-used "balanced" strategies dominated by equity and bond exposures. However, with equity markets reaching new highs and bond yields remaining extremely low by historical standards, such portfolios may face material headwinds over the medium-term.

These headwinds include modest forward-looking return expectations (given starting valuations), and the potential for a change in the behaviour of equity and fixed interest assets under certain economic scenarios.