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The risks and rewards of owning both shares and bonds

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

A sell off in bonds and shares at the same time is not out of the question, but it’s likely funds are more prepared for this “double whammy” effect than they were in the 1990s, says Shane Oliver, AMP Capital’s Senior Economist.

Not since 1994 have shares and bonds sold off at the same time. Oliver has written about the historical context of the two investment categories in this February note. Jeff Rogers, ipac Chief Investment Officer, has also written about shares and bonds correlations here.

Last time investors saw shares and bonds come under pressure at the same time it was at a time when inflation started to pick up and central banks started to raise rates, Oliver points out.

At that time, investors in conservative balance funds got hit as bond values fell more than share values did.

However, since then, diversified funds managers have learned some lessons, Oliver notes in this recent interview.

“You do see an attempt in diversified funds to diversify away from bonds and shares, particularly into unlisted assets such as commercial real estate and infrastructure which have low correlations with both equities and bonds to some degree,” Oliver notes.

“Likewise, fund managers are aware of the risks bond yields might rise, putting pressure on share markets. The way [funds] might manage that is to keep their bond holdings relatively short in duration, so if there is a sell-off in bonds, the losses won’t be too great,” Oliver notes.

Balanced funds are designed to provide investors with diversification.

“Yes, you want exposure to the share market, but you don’t want all your money in shares. You want to have your money in some other assets that may be lowly correlated to the share market, just in case the share market sells off, you’ll have some bonds in there that will rally at the same time,” Oliver says, explaining the rationale behind balance funds generally.

A sell off in bonds and shares at the same time is not totally unavoidable, Oliver highlights.

Recently bonds and shares rallied at the same time,” he notes. “That could go in reverse as inflation and interest rates start to rise,” he adds.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided. 

  • Equities
  • Fixed Income
  • Market Watch
  • Opinion
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