21 Jul 2022 2 min read

Active Strategies Q3 Outlook: all change, please

By Colin Reedie

If the market regime is changing, it may be time to pick your battles.


A consistent feature of financial markets for the last 30 years has been the mutually beneficial relationship between equities and bonds. When the former has gone through difficulties, the latter has helped soften the blow by delivering an offsetting positive total return.


The chart above starkly illustrates how powerful this relationship has been since the late 1980s. The lack of observations in the bottom left quadrant of the chart (<5%) sets today’s markets in a historical context. The most recent quarterly total return observation of -16.7% and -5.7% means a ‘60/40’ equity/bond fund has lost 12.3% in less than three months and takes the year-to-date outcome to -16.9% using these indices.1

This is where market ‘regimes’ can change. Over the last 12 months, we have witnessed changing dynamics between risky and risk-free assets in fixed income funds.

We regularly run competitor analysis, and we see that funds which have continued to run higher interest rate risk alongside higher credit risk have significantly underperformed as interest rate risk, which traditionally offsets credit risk, has instead moved in the same direction.


Will risk-free assets continue to act as risk-additive assets to portfolios, or will they return to being great insurance?

Read our Q3 Active Strategies Quarterly Outlook to discover more of our thinking on the topics that matter. In this issue we examine:

  • How much will we learn from the next downturn, and how will it shape investor behaviours in the next cycle?
  • What does all this mean for corporate fundamentals? We consider the outlook for companies’ credit quality.
  • With inflation at levels most have never seen before, which companies will be the winners and losers, as consumers are forced to change consumption and purchasing behaviours?

1. Data as at 21 June 2022.

Colin Reedie

Head of Active Strategies

Colin has responsibility for our Active Strategies team as well as overall portfolio management responsibilities for our Global Credit and Core Plus strategies. Colin joined LGIM in 2005 from Henderson Global Investors, where he was Head of Investment Grade Credit Fund Management. He has 25 years’ experience in bond markets, specialising in non-government debt, and he has previously worked for Henderson Global Investors, Scottish Widows and Scottish Amicable.

Colin Reedie