For many years, government bonds were viewed as a dependable buffer against stock market declines, providing capital preservation and income. However, the current inflationary environment has broken that correlation, forcing fund managers to seek new ways to protect retirement savings. This reassessment is occurring globally, with many pension funds reducing their sovereign debt allocations in favor of assets like private credit, commodities, and infrastructure.
The shift away from government bonds marks a significant departure from the traditional role of bonds as a portfolio diversifier that long balanced stocks and bonds. With bond yields rising and prices falling, the classic hedge has become unreliable. AMP's move is part of a larger reevaluation by institutional investors globally, as persistent inflation erodes the purchasing power of fixed-income assets and tightens the link between bond and equity performance.
These changes reflect a fundamental reassessment of portfolio construction. With government bonds no longer providing a reliable hedge, fund managers are turning to assets that offer inflation protection and uncorrelated returns, such as private credit and infrastructure. The shift is likely to persist as long as inflation remains elevated.
AMP's Big Move
AMP Chief Investment Officer Anna Shelley said the firm has cut government bond holdings across several funds over the past six to 12 months. "The main thing that we've done in recent times is to really reduce our weightings to government bonds," she said. The money is moving into corporate credit, commodities, and agriculture instead.
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Other big investors are doing the same. Colonial First State (CFS) has also reduced government bond exposure. CFS Chief Investment Officer Jonathan Armitage explained: "Traditional defensive assets aren't actually acting defensively anymore and that's connected with the challenges around government budget deficits."
New Hedges for a New World
AMP is putting more money into corporate credit, commodities, and agriculture. These assets may offer better diversification when bonds fail.
Colonial First State is also looking beyond bonds. They are moving into private debt, catastrophe bonds, and asset-based finance. Meanwhile, Australia's sovereign wealth fund, the Future Fund, stated in 2024 that it would "look to hedge funds rather than sovereign debt to offset equity risk," according to a fund announcement.
Returns Still Solid
Despite the bond cuts, AMP's MySuper 1970s pension fund earned 11.3% for the year ending June 30. Colonial First State's growth-focused MySuper Lifestage 1975-79 fund did slightly better at 12.7%. These returns show that removing bonds hasn't hurt performance yet.
AMP manages A$162 billion ($112 billion) in total assets as of February. That makes it one of Australia's largest asset managers. The decision to cut bonds affects many retirement savers.
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