In this month’s Bond Voyage, we introduce SHIELD – the downside protection framework used by our fixed income division. SHIELD is designed to ensure our portfolios remain resilient in challenging market conditions while maintaining capital efficiency.
Read this article to understand:
- Why hedging the downside is increasingly more important
- How SHIELD can assist in building better prepared portfolios for the future
- How it can help turn market conditions into tactical advantage
With volatility becoming a more persistent feature of fixed income markets, risk management is more prominent than ever, and current market dynamics have brought it into an even sharper focus. SHIELD – Strategic Hedging, Integrated Exposure and Loss Defence framework – is our way of strengthening portfolio defences. It builds on our existing risk philosophy while adapting to the demands of a changing market.
SHEILD brings together experts from across our three fixed income groups – Solutions, Core Income and Capital Opportunities – to develop smarter, more consistent and more efficient hedging strategies, using tools such as credit indices, options and interest rate hedges.
Why SHIELD matters
Historically, fixed income was a reliable counterbalance to equity risk. But in recent years, correlations between stocks and bonds have spiked, especially during periods of macroeconomic stress. The reduced diversification has exposed portfolios to drawdowns on both sides of the 60/40 portfolios (60 per cent equities/40 per cent bond), which have suffered simultaneously (see Figure 1).
In today’s fragmented and fast-moving financial landscape, traditional diversification is losing its edge. Asset class correlations are rising, macroeconomic signals are noisy, and volatility can strike from unexpected places. SHIELD is built to combat this, with precision, consistency, and strategic foresight.
Figure 1: Death of the 60/40 portfolio debate – growing correlation of assets
Past performance is not a reliable indicator of future performance.
Note: Annualised returns and volatility for a 60/40 portfolio, and correlations using S&P 500 and Bloomberg US Aggregate indices.
Source: Aviva Investors, eVestment. Data as of July 2025.
The real benefits of hedging the downside
Downside hedging isn’t just a defensive play, it’s strategic support for portfolios.
SHIELD not only insulates portfolios, it also supports conviction. By mitigating downside risks, portfolios can be allocated confidently to high-conviction ideas without being derailed by short-term volatility or macroeconomic noise.
The benefits are clear:
- Structural resilience and capital preservation: Building portfolios that can withstand correlation shocks and regime shifts
- Conviction with control: Enabling confident positioning while maintaining disciplined risk oversight
With protection built in, SHIELD ensures portfolios remain anchored to their strategy, even when markets lose their bearings.
Turning market conditions into tactical advantage
Today’s low-volatility, tight-spread environment presents a rare window for cost-efficient hedging. SHIELD is designed to capitalise on these conditions:
- Low volatility = lower hedging costs
When volatility is subdued (see Figure 2), hedging becomes more affordable. Locking in protection now can shield portfolios from future turbulence without eroding returns.
Figure 2: Investment grade credit index volatility at multi-year lows (basis points)
Past performance is not a reliable indicator of future performance.
Note: CDX/Cboe NA Investment Grade 1-Month Volatility Index (BP Volatility).
Source: Aviva Investors, Macrobond. Data as of August 18, 2025.
- Compressed credit spreads = strategic entry point
Tight spreads may signal complacency (see Figure 3), but they also offer attractive terms for initiating protection. SHIELD uses these dynamics to position portfolios defensively before the next repricing wave.
Figure 3: Investment grade credit index spreads at multi-year tights (basis points)
Past performance is not a reliable indicator of future performance.
Note: CDX NA Investment Grade index spread.
Source: Aviva Investors, Macrobond. Data as of August 18, 2025.
Building resilience with long-term vision
Downside protection is no longer a luxury, it’s a necessity. SHIELD integrates hedging into the DNA of portfolio construction, ensuring that risk management is proactive, not reactive. So, in a world of shifting macroeconomic tides and rising complexity, SHIELD offers a disciplined, forward-looking framework to help with:
- Safeguarding capital
- Enhancing strategic flexibility
- Aligning portfolios with core convictions
This is the future of fixed income risk management, where resilience is engineered and conviction empowered.
