April 25, 2020
According to the Financial Times: “One of the basic rules of investment is coming unstuck, forcing some fund managers to rethink how they build their portfolios.” All to say the classic portfolio structure — 60% stocks and 40% bonds — might be a loser going forward.
That’s because over the past 10 years, the “seesaw” relationship between stocks and bonds has steadily disintegrated as bond yields slumped but their prices increased in tandem with stocks. “The recent market chaos unleashed by the coronavirus pandemic has underscored the problem,” FT says, “with bruising trading periods in which bonds and equities have dropped in unison.”
The upshot? Traditional “balanced” portfolios have become high-risk… and fund managers are at a loss. According to a Bank of America survey in March, 52% of fund managers touted U.S. Treasuries as the best hedge against volatility. This month? That number dwindled to just 22%.
in a research note published by Bank of America Securities titled “The End of 60/40,” portfolio strategists Derek Harris and Jared Woodard argue that “there are good reasons to reconsider the role of bonds in your portfolio,” and to allocate a greater share toward equities.
“The relationship between asset classes has changed so much that many investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies,” Harris and Woodard wrote.
“The core premise of every 60/40 portfolio is that bonds can hedge against risks to growth and equities can hedge against inflation; their returns are negatively correlated,” Woodard and Harris added. “But this assumption was only true over the past two decades and was mostly false over the prior 65 years. The big risk is that the correlation could flip, and now the longest period of negative correlation in history is coming to an end as policy makers jolt markets with attempts to boost growth.”
So while fund managers and investors scrabble for a suitable portfolio hedge, the Financial Times notes: “Gold saw the biggest rise in popularity, helped by its strong recent performance.”