22 Dec 2025
When investors want to reduce risk, where do they turn? After almost two years of chasing returns, many now ask: is it time to add something more defensive?
The challenge is knowing what the right strategy is to invest in when these risks emerge. In the past, switching to Government bonds would have been a common move when risks were heightened, but the experience of 2022 changed this. With fiscal worries, geopolitical tensions and uncertain central bank policy, the case for defensive positioning has rarely been stronger.
Defensive investing isn’t about abandoning growth, it’s about resilience. The ideal solution should combine three essential attributes:
1. Capital preservation
2. Uncorrelated returns
3. Low volatility
Together these attributes can protect against downside risk while helping to diversify the risk and dampen the volatility of an overall investment allocation, something that is invaluable during times of market stress.
These are exactly the attributes you can find in an Absolute Return Bond fund. Unlike passive or long-only approaches, they actively manage risk and seek returns through multiple levers, credit rates, and relative value opportunities. This flexibility allows them to adapt to changing market conditions and deliver positive returns through the cycle.
Reducing downside risk and preserving capital is at the heart of an Absolute Return Bond fund. With the aim of delivering positive returns through the cycle, these funds can balance capturing upside from markets with a need to protect on the downside when markets are weak. By actively managing exposure and avoiding concentration risk, they reduce vulnerability during stress periods.
AARB Fund vs Cash Alternatives returns
Source: Bloomberg as at 31 December 2022. Based on daily returns of ICE BofA indices (in local currency) against Aegon Absolute Return Bond Fund B (Acc) GBP shares, net of fees.
A solution that simply rises and falls with the broader market will provide limited benefits to investors looking to diversify or “de-risk” their investments. Recent market events underscore the benefits that diversification and an uncorrelated return profile can provide.
You achieve this by actively managing both credit risk and intertest rate risk, and by having a number of ’levers’ that can be pulled to generate returns. For example, relative value trades can help enhance returns without taking directional risk.
This combination can help break the correlation between market returns and fund returns. The aim is to be uncorrelated, rather than negatively correlated, to provide the greatest benefits to investors.
Correlation vs asset classes since launch
Source: Aegon AM, Bloomberg, as at 30 September 2025. Correlations shown in the table are based on daily returns of Bloomberg indices (in local currency) against Aegon Absolute Return Bond Fund B (Acc) GBP shares, net of fees. Launch 30 September 2011.
The chart above illustrates this defensive profile in action. While cash alternatives and traditional Government Bonds experienced significant drawdowns during market stress periods, the Absolute Return Bond approach maintained more stable returns, demonstrating the benefit of active risk management and diversification across multiple return drivers.
A smoother journey is preferable to a bumpy one. By rounding off the ’sharp edges’ of financial markets, Absolute Return Bond funds can provide a lower volatility of returns. The first step to achieving this is to invest in appropriate assets. Short-dated corporate bonds provide an ideal mix of income and alpha opportunities, delivering an attractive risk/return profile. These shorter-duration bonds are inherently less sensitive to interest rate movements than longer-dated alternatives, providing a more stable environment.
Our experience demonstrates these attributes in practice. Over the past three-years, the Aegon Absolute Return Bond Fund has aimed to deliver competitive annualised returns while maintaining lower volatility than comparable asset classes. Positioned with a focus on risk-adjusted outcomes, it seeks to offer a more efficient balance than many traditional alternatives.
Correlation analysis supports this approach: the fund maintains low correlation with equities, government bonds, and credit indices, which can help provide diversification benefits when investors need them most. During periods of market stress, this profile can play an important role in portfolio resilience.
Annualised total return versus volatility –3yrs
Source: Aegon AM, Bloomberg, as at 30 June 2025. Reflects annualized total return and standard deviation (volatility) over a 3 year period. Based on daily returns. Aegon Absolute Return Bond Fund B (Acc) GBP shares for ‘AARB’ and the following indices in local currency: ICE BofA 1-5 Year German Government ‘GER Govt 1-5’; ICE BofA 1-3 Year German Government for ‘GER Govt 1-3’; ICE BofA 1-5 Year UK Gilt for ‘UKT 1-5’; ICE BofA 1-5 Year US Treasury for ‘UST 1-5’; ICE BofA 1-5 Year Global Corporate for ‘Global Corp 1-5’; ICE BofA 1-3 Year G7 Government (USD) for ‘G7 Govt 1-3’; ICE BofA 1-5 Year Sterling Corporate for ‘UK Corp 1-5’; ICE BofA 1-3 Year UK Gilt for ‘UKT 1-3’; ICE BofA 1-3 Year Sterling Corporate ‘UK Corp 1-3’’.
Looking ahead, uncertainty remains elevated. Central banks face complex policy decisions, fiscal pressures persist, and geopolitical risks continue to shape markets. In this environment, the case for a more resilient, defensive allocation is compelling.
The question is less about whether defensive positioning makes sense, and more about identifying solutions that balance protection with return potential.
At Aegon Asset Management, we bring over 14 years of experience managing Absolute Return Bond Strategies. The Aegon Absolute Return Bond Fund is designed with key characteristics investors often seek: capital preservation, uncorrelated returns and low volatility.
Building on our expertise in bond selection, the fund actively manages market risk and seeks to enhance returns through relative value strategies across credit and rates markets. This is not a passive, ‘set and forget’ approach, its active management applied where we believe it adds the most value.
The result? Defensive characteristics without unduly sacrificing return potential. With an attractive starting yield and a track record through multiple market cycles, this strategy offers a compelling opportunity for investors seeking resilience in today’s uncertain environment.
To find out more about the Aegon Absolute Return Bond Fund contact your usual Aegon Asset Management contact or click here to view fundpage.
Important Information
Colin Finlayson, CFA
Portfolio Manager
Colin Finlayson, portfolio manager, is a member of the global rates and multi-sector portfolio management teams.
Rory Sandilands
Portfolio Manager
Rory Sandilands, portfolio manager, is a member of the investment grade and multi-sector portfolio management teams. He specializes in global credit and absolute return portfolios.