For decades, bonds have formed the defensive backbone of traditional investment portfolios, valued for their ability to provide stability, income and diversification during periods of market stress. Yet recent years have challenged many of those assumptions, prompting fresh debate around whether fixed income can still fulfil its traditional role.

Ian Willings, Partner and Portfolio Manager at Apollo Multi Asset Management, shares his views on why investors may need to rethink some long-held assumptions around portfolio construction and diversification.

Recent market conditions have challenged some of the traditional arguments for holding bonds in diversified portfolios. What changes have you observed and why do you believe this matters for investors today?

For an asset class that has spent much of the past five years failing to deliver returns, diversification or protection, fixed income remains surprisingly firmly embedded in client portfolios.

Investors continue to cling slavishly to the textbook idea of equity-bond diversification and the well-worn 60/40 model – kept alive as much by persuasive marketing as by results. Markets, however, appear not to have read the same material.

Looking back over the past five years provides a useful lens through which to assess how different asset classes have behaved in practice, rather than in theory.

Cash has delivered a steady and positive return over the period. By contrast, most bond asset classes have struggled to generate meaningful returns, with many failing even to keep pace. UK government bonds have produced negative outcomes while the Bloomberg Global Aggregate index has also disappointed. Even corporate bonds – often positioned as a more attractive segment of the market – have delivered only modest gains.

For an asset class expected to provide stability, income, and protection, such numbers should, at the very least, make for uncomfortable viewing. And yet, despite this, bonds remain one of the most widely held components of portfolios, particularly for lower-risk investors.

The question is not whether bonds have historically worked or whether they are working now – it is why they continue to be relied upon so heavily, even as the evidence challenges the role they are expected to play.

If the evidence against traditional fixed income allocations has become so compelling, why do you think investors and wealth managers remain so heavily committed to bonds?

Bonds appear to enjoy a forgiving assessment, despite a much longer and more consistent record of disappointment.

Bonds have traditionally been held for good reason: they are meant to provide income, preserve capital and, critically, diversify equity risk – thereby forming the defensive core of portfolios designed to protect investors’ hard-earned wealth and help shield portfolios during times of extreme equity stress.

The assumption they continue to do so, however, appears to persist more out of habit than evidence.

The reality over the past five years is difficult to ignore. In many cases, investors would have been better served by a simple barbell of cash and equities – excluding bonds altogether – and paying lower fees for the privilege. The IA Mixed Investment 0–35% Shares sector, which is dominated by exposure to fixed income assets, highlights this clearly, having lagged even cash over the period.

At the same time, liquid alternatives, when considered at the aggregate level rather than through individual fund selection, have delivered positive outcomes over the same period, drawing on a broader and more flexible set of return drivers.

You argue that investors often misunderstand absolute return strategies by judging them too narrowly. What role should liquid alternatives now play in portfolio construction, particularly for cautious investors seeking diversification?

Yes, it’s a misunderstood asset class. Absolute return is not a single trade – it is a collection of different strategies responding in different ways to the same set of conditions.

In other words, it should be viewed as a broad, diversified basket of exposures – not a single fund to be selected and judged in isolation. When bonds struggle, they tend to struggle together. When absolute return strategies struggle, they do so for different reasons and, most importantly, not always at the same time.

Absolute return has never been positioned as an asset class that should deliver consistent positive returns in every month, nor one that should be inversely correlated to equities in all environments. That has never been the objective. And yet, it is often judged as though it were.

What is less frequently acknowledged is that, in the same environment, bonds, which are widely assumed to provide downside protection, not only failed to protect, but in many cases delivered more consistent losses across the board.

There is a clear asymmetry in how these outcomes are interpreted. When absolute return funds lose money over a short period, it is taken as evidence the approach is fundamentally flawed. When bonds do the same, often more uniformly, it is viewed as an unfortunate but temporary deviation.

Over longer periods, however, the evidence is increasingly difficult to ignore. Absolute return, when viewed as a diversified opportunity set, has delivered stronger outcomes than bonds across a range of metrics – not just returns, but volatility, drawdowns, and the balance of positive and negative periods.

The data makes this clear. When approached as a diversified allocation, absolute return has delivered stronger and more consistent outcomes than bond.

Selected IA sector returns – Five years to end-March 2026

Source: FE Analytics. Total return from 31/03/21 to 31/03/26

What role should liquid alternatives now play in portfolio construction, particularly for cautious investors seeking diversification?

The mistake made with absolute return is rarely the strategy itself, but rather how it is used. We do not expect a single equity or a solitary bond to represent the entirety of their respective markets – and so we diversify across sectors, geographies and issuers to mitigate specific risk. Absolute return must be viewed through this same lens.

Selecting a single absolute return fund and expecting it to perform in all conditions is no more robust than selecting a single bond and expecting it to represent the entire fixed income market. There is no silver bullet in this space – while the sector contains many excellent strategies, it also includes those that will inevitably encounter periods of friction. Relying on a single fund is an exercise in unnecessary concentration.

There is, however, clear scope for wealth managers to sift through this universe and build a robust portfolio of highly diversified strategies that can deliver strongly over time. By moving away from a reliance on one single fund and instead creating a diversified allocation, investors can better capture the true benefits of the asset class.

While liquid alternatives are not a substitute for every asset class, nor a guaranteed hedge in all conditions, they represent a more adaptive approach to portfolio construction – one that is less reliant on a single set of assumptions holding true.

The question, therefore, is not whether bonds should be removed entirely, but whether their role and weighting still reflect the realities of the current environment.