Blog | Maximising your balanced portfolio

Investors around the world are facing a problem: bonds aren’t doing what they’re supposed to do. For decades, we’ve had a blueprint for maintaining a balanced portfolio. Split your investments 60/40 between equities and bonds, using equities for growth and bonds for capital protection, and you have a tried and tested strategy for reliable returns year after year. But it doesn’t work anymore, and investors will soon find – if they haven’t already – that they need a substitute for bonds.

Historically, the 60/40 split has been a solid strategy because when equities do badly, bonds do better. In a recession, equity markets fall, but as central banks push interest rates down, bond prices rally as their yields become increasingly attractive. Depending on personal risk appetite or how much you needed fixed income, the split between equities and bonds might have varied. But on the whole, a 60/40 split was, at one time, a strong starting point.

Fast-forward to 2020, and what we find is that bonds no longer rise when equities fall. In the US, the S&P 500 hit a low of 3,209.45 on 24 September – touching correction territory at 10% below where it was on 2 September. Bonds, however, didn’t rally. In fact, in the low-interest economic environment we’re in, they can’t rally: they trade at a near 0% yield and there is very little room for those yields to go down and prices to go up. As a friend recently remarked, government bonds no longer offer risk-free returns; they offer returns-free risk.

Ideally, the solution to overcoming this problem is something closer to a 60/20/20 split, moving some of that bond allocation into alternative asset like real estate, infrastructure and private equity.

With comparatively high yields and transparent income streams, the real estate sector offers an ideal substitute for bonds for investors looking for those hard to find bond-like characteristics. That’s one of the main reasons why IPSX was created: to give investors the opportunity to buy shares directly in public companies that own single real estate assets on an FCA-regulated exchange.

When you are investing in a public company listed on IPSX, you’re making an investment in an equity that behaves, in some ways, like a bond. The reason is because investors through the prospectus get to analyse a building’s tenants – their cash flows and the probability of default given their covenant strength – and can assign a risk rating to its income, just as you would for a bond.

If you have invested in a public company that owns a building in which a company pays rent, you earn your turnover higher up that waterfall rather than waiting to receive it as distributed profits at the bottom. This gives IPSX investors greater certainty of cash flows.

That’s why you shouldn’t think of IPSX shares simply as an equity. In the hunt for stable, reliable yield, think of them as a bond substitute. At a time when bonds no longer work, we still need fixed income for our balanced portfolios, and securities on IPSX provide that.

If you'd like to discuss IPSX in further detail, we'd be delighted to hear from you.