Portfolio Dilemma: which funds give me ballast?

An ii Community members asks: What ideas do you have when it comes to bond and absolute return funds to add a portfolio buffer? 

(ii Community is a social trading network to connect with investors, talk about your investments and see how your portfolio compares to others)  

Investment gains have looked readily available for much of the last decade, with classic “risk” assets doing big numbers. Equity markets have run hard for most of that period and have had an especially strong showing in the last 12 months. 

There are, of course, some of the usual concerns: that artificial intelligence (AI) enthusiasm has created a market bubble, or that a handful of stocks are driving too much of the return. 

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With that in mind, it makes sense to seek out more defensive assets while you can, and bond and absolute return portfolios often try to play this role. 

To break the basic concepts down, defensive bonds (from governments or companies with higher credit ratings) should often act as a safe haven when equities struggle. 

Certain absolute return funds, meanwhile, seek to ride out different market conditions and still generate a gain, using a variety of different tools. Absolute return became fashionable in the wake of the financial crash of 2008. 

A few funds do stand out. But the problem is that defensive assets only work in the right conditions, and absolute return funds can come with multiple complications. Investors might therefore consider such portfolios, but not restrict themselves to these names when looking for diversifiers. 

A bearish case study: bonds 

To illustrate this point let’s take 2022, a year that saw equities struggle and the MSCI World index lose around 8% in sterling terms, thanks to some very sticky inflation and the resulting interest rate rises. Some bond and absolute return funds performed well for the year, but only a handful and only those in certain specialist areas. 

To start with bonds, a real weakness of the asset class is that it dislikes inflation and hates interest rate rises, given that it makes the income they pay out become less attractive. Lots of bond funds sustained damage in 2022 and it was mainly those names with short duration, or limited sensitivity to rate changes, that did OK.  

Think, for example, of the iShares $ TIPS 0-5 ETF USD Dist (LSE:TIP5)  or Amundi Euro Corporate Bond 0-1 Year ETF. UK government bonds in general struggled, as did anything with high duration. 

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The problems of UK government bonds in particular have not abated for various reasons, but if you believe in their enduring defensive qualities there are options. 

Think of broad funds like the Amundi Core UK Govt Bd ETF Dist (LSE:GILS), which offers a yield of close to 5% and holds a mixture of different bonds by maturity. 

A fund with a more international reach is the iShares Core Global Aggt Bd ETF USD HAcc (LSE:AGGU), which has more than half its portfolio in government bonds and spans multiple geographies. 

It’s also worth noting that flexible bond funds can sometimes ride the ups and downs. We recently looked at the so-called strategic bond funds, and the fact that names like MI TwentyFour AM Dynamic Bond I Acc (B5VRV67) and Jupiter Strategic Bond I Acc (B4T6SD5) offer good diversification.  

But names like this still suffered pretty badly in 2022, so are not immune to the problems specific to their asset class of choice. 

Absolutely mad 

Some of the absolute return “winners” from 2022 show that this is a disparate sector and that any such fund needs carefully researching – and understanding. 

One strong performer from that year was Aviva Investors Mlt-Strat Trgt Ret 2£Acc (BMJ6DT2), which looks to deliver positive returns over a rolling three-year period and limit volatility.

It’s an esoteric fund and, frankly, not easy to understand. Recent literature shows that its investments include being long on “thematic” equities, being “short US rates” (which could mean limiting duration on US government bonds, or even betting on a move in rates), and making a bet on US equities versus European equities.

An issue with such funds is they are complicated and tricky to understand (and fit in with your portfolio), and that they can take bets on very specific outcomes. That makes their performance inconsistent. 

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Another example of a 2022 strong performer was YFS Argonaut Absolute Return I GBP Acc (B79NKW0), which takes long and short positions. But it can be pretty volatile and shouldn’t be viewed as a defensive holding.

It may instead make sense for investors to back very sedate absolute return funds with a history of pretty moderate gains and losses, with Janus Henderson Absolute Return I Acc (B5KKCX1) serving as one example. 

That made a very small loss in 2022, and has generally been a dull but reliable presence in a portfolio, making a return of around 7% in both 2025 and 2024. It holds a large number of shares, including the likes of Convatec Group (LSE:CTEC) and Severn Trent (LSE:SVT), and looks to outperform the UK base rate. It also takes short positions. 

It’s also worth remembering other diversifiers. 

There are, of course, wealth preservation trusts Ruffer Investment Company (LSE:RICA), Capital Gearing Ord (LSE:CGT) and Personal Assets Ord (LSE:PNL), which hold assets such as bonds and gold exposure alongside equities as a way of protecting your capital. 

They are, again, subject to the waxing and waning of some classic safe-haven assets, but can at least diversify here.