“The 60/40 portfolio is definitely not dead, in fact, after the repricing that we’ve seen this year across fixed income markets, we would argue that it’s very much alive,” said Erin Browne, portfolio manager for multi-asset strategies at Pimco. “We now see real value in several segments of the fixed income market, including investment grade bonds, mortgages and securitized products.”
The 60/40 strategy is on course for the first quarterly gains this year as stocks recoup some of their losses from June lows, according to a Bloomberg index. More broadly as the Fed makes headway in its inflation battle, the hope is that bonds will have more capacity to hedge stock meltdowns, says Vincent Mortier, chief investment officer at Amundi, Europe’s largest fund manager.
“It was the perfect storm in terms of returns but negative correlations are coming back into the marketplace, which means bonds will become diversifiers again,” he said. “It’s time to look at bonds again.”
During most years when the 60/40 portfolio delivered negative returns of more than 1%, the successive three to five years produced double-digit annualized gains, according to Wells Fargo Investing Institute. For example, after the classic portfolio was down 21.6% in 2008, it returned an average of 11.9% in the following four years through 2011.
Given these investing lessons from history, bond bears are getting less pessimistic.
Paul O’Connor, the head of Janus Henderson’s multi asset team for the UK, for example, has been closing out an underweight position on fixed income to hedge a deeper equity drawdown.
“If you look at yields it’s beginning to look very interesting from a total returns perspective,” O’Connor said. “After a repricing of short-term rate and inflation expectations, it’s becoming plausible that bonds will regain a useful role in a multi-asset portfolio.”
--With assistance from Allegra Catelli.
This article was provided by Bloomberg News.