2022 was a terrible year for fixed income, but not for DNCA
October 17, 2025
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4 min
For much of this century, investing in fixed income has been relatively straightforward. Investors could watch prices rise and yields fall alongside interest rates. While rates hovered close to zero and inflation stayed low, fixed income worked as an effective hedge against equities. Then in 2022, things changed. Central banks around the world rapidly raised interest rates to combat rising inflation and many investors were caught off guard.
2022 ended as a terrible year for most investors. Equity markets fell around the world with the S&P 500 down nearly 20% and the MSIC World Index down around 19% for the year1. What made this bad year even worse was fixed income markets falling alongside equity markets. Global bonds lost 31% in 2022 and most fixed income funds and portfolios returned a negative result for the year2. US Treasuries dropped nearly 40% - their worst result since data was first collected in 1754!
However, some strategies managed to deliver positive returns for the year, and DNCA alpha bonds* was one of them.
How did DNCA’s alpha bonds* strategy deliver positive returns in 2022?
While many traditional fixed income funds dropped -15% or more, DNCA’s alpha bonds* strategy declined only modestly and then quickly rebounded to achieve a positive return by year-end.
The DNCA alpha bonds* strategy managed to avoid the big drops of many of its peers thanks to its flexibility and ability to adapt to new conditions as the market environment evolved.
Two main positions the investment team took made the biggest difference:
Early in 2022 the DNCA alpha bonds team determined that Covid and the war in Ukraine would drive inflation higher and, more importantly, it would not be transitory. So the team took a short position in G10 nominal bonds and as rates climbed, bond prices fell and they profited. Given the team expected inflation to remain high, or keep rising, they also invested in inflation break even trades - this is the yield spread between inflation linked bonds (bonds whose principal and interest rates are adjusted for inflation) and nominal bonds (bonds that pay a fixed interest rate). In 2022, as inflation climbed, the spread between the yields on these bonds widened and so contributed positively.
The market environment continued to change quickly, and DNCA’s agility and the flexibility of the strategy allowed the team to rapidly reposition when necessary to generate a positive calendar year return, despite the challenging conditions.
While the DNCA alpha bonds* strategy may not achieve returns as high as some peers in standout years, its strong focus on absolute returns has seen it deliver positive calendar year returns every year since inception in 20193. These consistent positive returns have allowed it to continue to grow and compound capital every single calendar year, since the strategy started in 2019.
Fixed income is no longer a reliable hedge against equities
While 2022 was a shock for many investors, in many ways it shouldn’t have been. As the graph below shows, stocks and bonds were positively correlated (moved in similar ways) for much of the 30 years before 2000. But as the graph also shows, things haven’t suddenly gone back to normal since 2022, as the positive correlation between stocks and bonds continues.
