- AJ Bell has reduced cash equivalent holdings across selected portfolios and reallocated capital to short-dated US Treasury Inflation-Protected Securities (TIPS)
- The move follows a rise in US real yields, with short-dated inflation-linked bonds offering an attractive alternative to cash
- The change modestly increases exposure to inflation-adjusted returns while keeping overall portfolio risk characteristics broadly unchanged
- Changes were applied across the AJ Bell funds and MPS at the latest rebalance this week
James Flintoft, head of investment solutions at AJ Bell, comments:
“Cash equivalents have played an important role in portfolios over the past two years as interest rates rose sharply. However, the balance of opportunity is now shifting.
“With real yields at more attractive levels, we believe investors can be better rewarded by moving a portion of excess cash into short-dated inflation-linked bonds.
“In April this year we reallocated a portion of cash and cash equivalents into short-dated UK, US and European government bonds, recognising the opportunity presented to investors after a repricing of government bonds in the wake of the Iran conflict.
“The latest decision to reduce cash equivalent holdings across selected portfolios and reallocate capital to US TIPS allows AJ Bell portfolios to benefit further from more attractive yields on short-dated bonds.
“This is not a major change in portfolio risk. It is a measured adjustment designed to improve the quality of fixed-income exposure, increase access to real yields and maintain resilience against inflation risks.
“Our view is that the old world of reliably low inflation is unlikely to return in quite the same way. Central banks may still describe 2% inflation as the target, but in practice it looks increasingly aspirational. In a new regime shaped by higher government borrowing, deglobalisation, energy security, ageing populations and more active fiscal policy, 2% may prove to be closer to a floor than a ceiling. That makes real yields and explicit inflation protection more valuable considerations for portfolio construction.
“After a period where cash was unusually rewarding, short-dated US TIPS now offer an attractive way to put that cash to work without materially changing the overall risk profile of the portfolios.
Portfolio changes
“The adjustment applies to portfolios that hold both excess cash and government bond exposure. Just under half of each relevant portfolio’s cash allocation has been moved into short-duration US TIPS.
“The result is a meaningful increase in real yield exposure while leaving nominal bond exposure unchanged. The change is evolutionary rather than revolutionary. It modestly increases portfolio duration and real-yield exposure, while the overall impact on expected risk and return remains limited.
“The changes have been applied across the AJ Bell funds (Cautious, Moderately Cautious, Balanced, Moderately Adventurous and Income) and MPS (Passive, Active, ‘Pactive’ and Responsible 1, 2, 3, 4, Passive Income 1 and Active Income 1).”
Source: AJ Bell Investments