Asset Risk Consultants, an international investment consultancy, releases new analysis assessing performance across risk profiles.

Analysis from Asset Risk Consultants shows that performance across risk profiles bounced back in January, but the proportion of private client portfolios in the lower-risk cautious and balanced categories fell to a record low.

According to the firm, the most common portfolio strategy was up 3.5 per cent in January 2023, having fallen by 10.2 per cent in 2022.

However, caution was unrewarded as the perfect storm of rising inflation and the normalisation of bond yields blew away the value of bonds, the firm continued. The lower risk categories, balanced and cautious, failed to offer capital protection and fell 9.1 per cent and 7.6 per cent respectively. 

The proportion of portfolios in the cautious category fell from around 10 per cent at the end of 2010 to below 1 per cent at the end of 2022, the firm added. Taking the two lowest risk categories together, the percentage fell from around 40 per cent of portfolios to around 15 per cent.

Since the financial crisis, bonds have delivered negative real returns. As a result, private client discretionary managers sought to minimise exposure to fixed income as the suitability of conventional multi-asset class portfolios was called into question, the firm said.

Nevertheless, there is evidence that the financial repression of bonds delivering negative real returns may be ending and, with equity market valuations returning towards historical norms, investors can expect to achieve positive real returns once the current inflation rate subsides, the firm continued.

Graham Harrison, chairman at ARC, said: "Looking to 2023 and beyond, it seems likely that investors will face ongoing uncertainty. However, uncertainty also creates opportunities for discretionary managers and, with equity valuations becoming more attractive and real bond yields improving, there is hope that 2023 will be a better year for investors.”

"It also seems likely that portfolios exhibiting a risk profile of the cautious or balanced asset categories will see something of a renaissance as bonds begin to offer the prospect of positive real returns,” he added. 

“For a decade or more it has made sense for investors to throw caution to the winds with only equities appearing to offer a positive real return. That has changed and once again it has begun to make sense to consider bonds as a viable investment class," he said.

ARC collects the actual performance of more than 350,000 investment portfolios from more than 140 investment managers. A steady growth portfolio typically has around two-thirds of exposure to equities with the remainder in other asset classes such as bonds. See here for previous articles about ARC.