Investors have started spring dialling up their defensive investments

AJ Bell DIY investors have been adding to their more defensive portfolio options over the past few weeks as they responded to the volatility created by conflict in the Middle East.

Looking at net flow data across AJ Bell’s platform since the start of March and the past two weeks in particular, and among its suite of managed funds, net flows into the AJ Bell Balanced and AJ Bell Moderately Adventurous funds were higher than they had been at the start of the year. Both of these funds have a deliberately higher exposure to bonds, typically a ‘steadier’ asset compared to more aggressive investments like shares.

How investors have been getting more bond and cash exposure

The AJ Bell portfolios were joined by other more ‘cautious’ well-known multi-asset funds, including the Vanguard LifeStrategy’s 60% and 80% equity options.

The Royal London Short-Term Money Market fund also got more attention, a type of fund which effectively offers investors a low risk alternative to money in a cash savings account.

Investors have also been buying bonds directly, with the HM Treasury gilt 0.125% proving popular in April, along with ETFs tracking fixed income assets like the iShares Ultrashort Bond ETF.

AJ Bell's Investment team made a nod to their bond exposure during their Q1 review, having allocated towards the shorter end of the yield curve.

And it’s not just AJ Bell or its customers who have been buying bonds. The latest Bank of America survey is one of the most popular sentiment checks for asset management, covering 170 respondents managing $511 billion in assets. It found that asset allocators have have been buying more bonds.

‘Global conflict’ is the most common worry for fund managers according to the survey, followed by inflation then a ‘disorderly rise in bond yields’.

But it’s not all doom and gloom because although fund managers are feeling tetchier than they were when the Strait of Hormuz was fully open, sentiment isn’t as bad as it was this time last year after the announcement of ‘Liberation Day’ tariffs.

Equities are still getting inflows too

While investors have been upping their defensive stakes that doesn’t mean they’ve become completely risk averse as equity funds and stocks have remained popular since the start of April.

Among AJ Bell funds, AJ Bell Adventurous portfolio continued to see strong inflows in the first two weeks of April. As its name suggests, this fund is for investors able to tolerate a higher level of risk than the other managed funds because it holds 100% in equities, one of the riskiest types of investment assets in the market.

Global index trackers have also continued to see inflows, namely the HSBC FTSE All World ETF and the Vanguard version. In terms of individual stocks, tech firms Micron and Microsoft proved popular too.

Why do investors opt for bonds?

Bonds are classed as less risky than equities and are typically a relatively ‘stable’ part of a portfolio. At the most basic level bonds are a type of loan to a government or company, in exchange for regular interest payments (known as the coupon) and the promise that your original investment will be repaid at the end of a fixed period.

This fixed payment element is what gives bonds their reliable, consistent nature, although they are still subject to price changes. Bond prices move up and down and that impacts the yield investors can expect while they own it. Bond prices and yields have an inverse relationship. When the bond price rises, yields fall and vice versa.  

During March, as the Iran conflict escalated, most sectors averaged an overall loss bond bonds losses were much narrower than the equity portfolios, around 1-2% versus double digit losses in emerging market or UK equity funds, according to data from FE fundinfo.