The best diversifier?

Until recently, fixed interest was the “go to” diversification tool for investors when they wanted to protect, or at least soften, any dramatic falls in their equity portfolio.

- John Dyall

The reasoning was that while fixed interest was the lower returning asset class, it contributed to total performance by outperforming shares in certain environments, such as when the economy was slowing or going into recession.

In that situation central banks lower short-term interest rates, which reduces returns from short duration assets such as cash. Longer duration assets, such as government bonds, react to slower future economic growth by reducing yields. This increases bond prices which partially offset the losses from the equity portfolio.