Iran conflict leads AJ Bell to rethink cash holdings across cautious and balanced MPS ranges

AJ Bell has cut cash allocations by up to 8 percentage points across its cautious and balanced MPS ranges, moving into short-dated government bonds after the Iran conflict triggered an inflation shock that sparked a repricing in the bond market ahead of anticipated central bank rate rises.

James Flintoft, head of investment solutions at AJ Bell, said: “The conflict in Iran has brought another inflation shock to the bond market and we believe the repricing of government bonds presents an opportunity for investors.”

Rate expectations have shifted across multiple central banks as a result, with several now anticipated to raise rates during 2026. UK gilt yields have been the most volatile of the three regions AJ Bell monitors since the conflict began.

Until now, cash and short-term money market funds have served as rational defensive holdings within AJ Bell’s portfolios. Competitive yields, the absence of price risk and the ballast they provided against government bond volatility all made them additive to portfolio construction.

The problem, Flintoft argued, is one of timing. Cash yields only improve once central bank rate hikes actually happen. The bond market, by contrast, has moved ahead of those decisions.

“The bond market has already priced in the expected path of rate rises,” he said. “That means investors in short-dated government bonds are being compensated today for the outlook, rather than waiting for it to materialise.”

AJ Bell’s argument also rests on what Flintoft described as “a more favourable asymmetry” in short-dated bonds relative to cash.

If rate hikes materialise as expected, short-dated bonds and cash are likely to deliver similar returns. The asymmetry comes from the alternative scenario of hikes not being delivered.

"If those hikes fail to materialise, perhaps because recession risk rises or the economic backdrop deteriorates, bonds are better placed than cash,” Flintoft said. “A fall in rate expectations would support bond prices in a way that cash simply cannot benefit from.”

The reallocation applies to all AJ Bell funds and all MPS ranges that carry an existing allocation to UK gilts and global government bonds on a GBP-hedged basis. The affected funds are AJ Bell Cautious, Moderately Cautious, Balanced and Income.

The headline changes across risk profiles 1 to 3 can be seen in the following table.

Source: AJ Bell Investments

The largest reductions fall in the lower-risk profiles, which held the greatest cash weightings to begin with. Risk Profile 1 sees cash cut by 8 percentage points, split across UK gilts, US Treasuries and European government bonds.

Flintoft stressed this is not a move into long-dated bonds: “The objective is to capture a better starting yield and a modest degree of rate sensitivity, without meaningfully increasing interest rate risk relative to a cash position.”

The natural first instinct, Flintoft acknowledged, would be to concentrate the move entirely in UK gilts. The yield pick-up available in the UK has been the most attractive of the three regions.

But UK yields have also been the most volatile since the Iran conflict began, which introduces single-market risk if the entire allocation goes there.

“By splitting the reallocation across UK, US and European government bonds, with the non-sterling exposures managed on a GBP-hedged basis, we achieve regional diversification whilst eliminating the currency risk that would otherwise accompany the US dollar and euro positions,” Flintoft said.

AJ Bell is not abandoning the case for cash – the firm’s position is that the balance of the argument has shifted, not that cash no longer has a role.

“For some time, cash and short-term money market funds have been a rational defensive holding. But we believe the balance of the argument is shifting in favour of moving up the curve into short-dated government bonds,” Flintoft said.

“The key issue with cash at this point is one of timing. Yes, cash yields could improve further if central banks deliver the rate hikes that are widely anticipated, but those hikes will only feed through into money market returns once they happen. The bond market, by contrast, has already priced in the expected path of rate rises.”