The 60/40 portfolio is no longer in favor at the world’s largest asset manager, where strategists say they are tearing up the playbook to help build more resiliency for investors.
For those following the strategy that dictates putting 60% of a portfolio in stocks and 40% in bonds, last year would have likely been disappointing. The S&P 500
SPX,
+0.09%
recorded its worst annual return since 2008, and bonds
TMUBMUSD10Y,
3.577%
failed to play their part as a portfolio diversifier.
“Those used to work when both assets trended up and bonds offset equity slides. We think a focus on any one asset allocation mix misses the point: A regime of higher volatility with sticky inflation needs a new approach to building tactical and structural portfolios,” said a team led by Jean Boivin, head of BlackRock Investment Institute, the research unit of the money manager.
While the start of 2023 has been strong for 60/40 fans, after the worst year in decades, the BlackRock team say they “don’t see the return of a joint-stock bond bull market like we saw in the Great Moderation.”
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“That was a decadeslong period of largely stable activity and inflation when most assets rallied and bonds provided diversification when stocks slumped. We think strategic allocations of five years and beyond built on these old assumptions don’t reflect the new regime we’re in – one where major central banks are hiking interest rates into recession to try to bring inflation down,” said the strategists.
As for their new playbook, the BlackRock team is avoiding broad allocations. For example, they find short-term bonds appealing on their view that the Federal Reserve is unlikely to cut rates or return to a historically low rate environment. They are overweight inflation-linked bonds on both strategic and tactical horizons given they see inflation as sticky.
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And in place of a broad public stock position, Boivin and the team are scanning sectors and private equity markets to “build more resilient portfolios in the new regime.” Over the next 6 to 12 months, they plan to seek out energy and healthcare and companies with stronger earnings and cash flow that can hold up during a recession, along with resilient supply chains, strong market share and the ability to pass along inflation.
Being nimble is even more important owing to geopolitical tensions, energy transitions and shifts caused by banking sector turmoil, they said. “We’re adjusting our strategic portfolios more frequently in response to new information and market shocks,” said the BlackRock team. “We think that getting the asset mix right in the new regime will be crucial for maximizing returns.”
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