Rethinking fixed income in passive portfolios: why the ‘set-and-forget’ approach can be risky

When investors think about portfolio construction, the conversation often starts, and ends, with equities. In the world of passive portfolios, fixed income allocations can be overlooked. Under Defaqto requirements, at least 90% of a passive portfolio must be invested in passive instruments. That leaves limited scope for active management.

Yet while many investors focus almost exclusively on their passive equity exposure, they forget that the fixed income side of the portfolio is just as important - and arguably more sensitive to the macroeconomic environment.

For a balanced portfolio holding 40% in fixed income, ignoring the nuances of bond allocations is a serious risk. Unlike equities, where broad diversification can sometimes mask poor positioning, bond allocations can expose portfolios to concentrated risks in duration, credit, and government debt exposure.

When bond markets turn volatile - lessons from recent history

The UK’s market turmoil during Liz Truss’s brief premiership is a stark reminder of how government bond markets can turn volatile in response to unexpected policy decisions, with gilt fund losses of over 20%. While many might view this as a one-off political miscalculation, the underlying vulnerabilities that created such dramatic market reactions haven't disappeared.

With persistently high government deficits, heavy debt burdens, and high interest rates, bond markets remain sensitive to external shocks.

And while Chancellor Rachel Reeves is clearly no Liz Truss, events beyond the UK government's control - for example Trump’s tariff policies, geopolitical tensions and energy price shocks - could trigger similar market reactions.

Why that matters

If a balanced portfolio has 40% allocated to fixed income but that allocation is passive and, in the UK, could be tilted toward gilts without nuance, the portfolio could be exposed to events such as credit or duration risk that passive equity strategies would not highlight. In the Truss scenario, investors learned how quickly even high-quality bonds can become volatile.

Our approach: active monitoring, even in a passive framework

At Crossing Point, our philosophy is to ensure that both equity and fixed income allocations are actively monitored within the passive framework. We have taken decisive steps to reduce our exposure to longer-term bonds and government debt in light of higher interest rates, elevated debt levels, and political uncertainty.

This proactive approach ensures that our clients’ portfolios are not only balanced on paper but also resilient in practice. By adjusting both sides of the allocation, we aim to safeguard portfolios against asymmetric risks that can undermine long-term stability.

The proof is in the performance

Our decision to shift toward shorter-dated fixed income allocations has already demonstrated its value. When looking at the fixed income portion of our Passive Balanced portfolio, the new allocations have provided higher returns and lower volatility compared to the previous version with a higher allocation to longer-dated fixed income funds.

Over a 72-day period from 19 June 2025 to 26 September 2025 the fixed income allocation within the Passive Balanced portfolio delivered a return of 1.72% (6.67% annualised) versus 1.62% (5.46% annualised) for the previous allocation. This has provided a higher level of return for a lower level of risk - exactly what investors need in uncertain times.

We continue to monitor our fixed income allocations across our portfolios and make amendments as necessary, ensuring that our passive framework remains responsive to changing market conditions.

The bottom line

Passive investing doesn’t mean passive thinking. A balanced portfolio is not truly balanced if the fixed income allocation is left on autopilot. Especially when nearly half the portfolio is fixed income, a simple passive bond allocation can leave you dangerously exposed to market shocks. In an era of high rates, rising debt, and heightened political risk, active oversight of bond allocations within passive mandates is not optional – it’s essential.