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November 2023 Asset Allocation Changes: Bonds looking better

21 November 2023
By Model Portfolio Service  - Investments Team

We’ve reduced equities and increased bonds in our Passive, Hybrid and Global ESG Themes portfolios. The changes were reflected in a rebalance instructed on the 13 November 2023.

For our Hybrid models, we’ve also changed the M&G Emerging Market Debt Fund to a share class that hedges the currency risk of the US dollar bonds within the fund to pound sterling. We’ve been wanting to make this change for some time, and had been working with platforms to onboard the funds to implement it.  

In this article, we cover what we’re seeing in markets, why we made a change now, and what we think the future could hold.
What’s been different in 2023?
Higher interest rates, inflation and bond yields represent a reversal from the years of low interest rates and benign inflation. The yields of bonds issued by the US government are back to where they were in 2007, with US 10-year treasuries reaching 5% pa in October. ‘Core’ inflation remains sticky across developed markets, despite signs it is now on a downward trajectory. ‘Core’ inflation is a measure that strips out food and energy prices.  In the future, higher energy prices created by recent geopolitical events could further delay returns to target inflation levels. 
What are we changing and why now? 
Markets are evolving quickly, which means we have to review our portfolio positions more regularly. This ensures we can capitalise on opportunities, while managing risk, to ensure the right outcomes for clients. The asset allocation for the model portfolios is set by M&G’s Treasury & Investment Office. With the geopolitical uncertainties in the Middle East as well, the M&G Treasury & Investment Office decided to adjust the asset allocation of the model portfolios.

The key changes are:
  • More in Fixed Income: As bond yields have risen further over the course of 2023, they are now attractive. This is particularly true in inflation-linked markets where real yields have risen to 14-year highs. We’ve introduced a new allocation to Index Linked Gilts, whilst increasing the allocation to UK Gilts and US Treasuries.
  • Less in Equities: We’ve reduced exposure across equity regions. We don’t have a negative view on equities; we just think there are more opportunities in fixed income. We still have a positive view on India, due to its favourable demographics and exposure to the globalisation of services. China equities also remain in our portfolios, as we think the negative view over the last couple of years is fading. 
  • No changes to Property, Absolute Return and Infrastructure: Real assets, like global property and infrastructure, can deliver returns when inflation is higher. We are keen to maintain this exposure that is conducive to the current environment despite recent pressure on valuations. 
We expect the world to continue moving at a faster pace. M&G’s Treasury & Investment office monitor economies and global markets closely, ensuring the asset allocation of the portfolios can deliver returns that support clients’ objectives. We think it’s important to be well-diversified across different asset classes and regions. As the world changes we are open to adding new asset classes and evolving our approach.

Past performance is not a reliable indicator of future performance. The value of an investment can go down as well as up and your client may get back less than they’ve paid in.

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