Lloyds Banks private banking division, which invests the money of wealthy clients, has said it will start to reduce its exposure to bonds as their value is set to fall.
Instead, it will start to increase investment in absolute return funds to provide the steady income which bonds once did.
Absolute return funds are liquid vehicles which employ strategies similar to hedge funds, such as short selling and investing in futures, options and unconventional assets, but are generally less risky and expensive.
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“Bonds, the traditional conservative anchor of multi-asset portfolios, no longer deliver,” said Lloyds Bank Private Bankings chief investment officer Markus Stadlmann.
This is due to inflation, changes in monetary policy to begin unwinding the policy of buying bonds, and increasing market volatility.
Inflation is also being driven up long term by younger-feeling retirees who are spending more, technology which Stadlmann predicts will have little effect on the labour market long term and migrants, who often spend more in the country they move to.
The decision to reduce exposure to bonds came as part of Lloyds Private Banking's long-term investment strategy review, which looks forward as far as 2027.
Read more: Stock markets slide and bond yields jump as US inflation surprises on the upside
Instead, Lloyds is set to start replacing bonds with absolute return funds at the core of investment portfolios.
“These funds now consistently live up to their absolute return name, even when markets are not easy to navigate,” said Stadlmann.
He believes this is partially due to their use of technology to analyse information, which is better than that of most other asset managers.
They are getting better at analysing data, but also at using machine learning to help inform investment decisions. Added to that, they perform well in times of volatility.
Read more: Revealed: The top performing ISA funds last tax year
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