Asset owners mull options to 60/40 portfolio amid inflation
The "60/40 portfolio" is a popular investment strategy for moderate risk investors, with 60% allocated to equities and 40% to fixed income.
This traditional portfolio mix was expected to provide diversification since generally when stocks drop, bonds increase in value and vice versa.
HSBC Life
That stock-bond relationship worked well over the past decade of steady growth and returns following the global financial crisis, and has typically been the starting point for building portfolios.
In 2022, however, that portfolio mix experienced one of its worst years on record as both equities and fixed income came under pressure.
Investors may need to consider alternative strategies in the current high inflationary pressure environment, according to William Chan, chief investment officer of HSBC Life.
Also read: HSBC Life, APG: How inflation is changing asset allocations
“That portfolio mix tends to work best when the economy is going through a recovery phase,” Chan said at AsianInvestor’s Asian Investment Summit last month.
Chan expects that inflation will remain at an elevated level until next year where he expects it will settle at around 3%—and that is one of his more positive projections, he said.
“The 60/40 portfolio tends not to do as well in a high inflation scenario,” said Chain.
FIXED INCOME
Investors needs to exercise more discretion instead of blindly following a 60/40 model.
Thijs Aaten, chief executive of APG Asset Management Asia, noted that taking a long-term view when investing in fixed income assets can yield positive result even in a high interest rate environment.
“With higher interest rates, buying a bond with a 3% yield can still be beneficial in the long run, as the investor will earn that yield and potentially avoid market valuation swings if they hold the bond to maturity,” he said at AsianInvestor's event.
APG
“Fixed income assets still have a role to play in our portfolio due to the need for buffers when investing in real assets,” he added.
Also read: HSBC Life sees no evidence of incoming rate cuts
UNCOMMON CORRELATION
The drop in fixed income last year in tandem with equities - in some cases, to a greater extent - took many investors by surprise, as they assumed they were well diversified.
Also read: APG Asia CEO: the age of free money drawing to a close
Janus Henderson
Yet Andrew Hendry, CEO Singapore and head of distribution Asia at Janus Henderson Investors, believes many investors may be throwing the baby out with the bathwater by thinking the 60/40 portfolio mix is completely broken.
“You would have to be 91 years old, to have experienced the same correlation of equity and bond markets just a handful of times in your life - so this is not a frequent occurrence,” Hendry told AsianInvestor’s audience.
Hendry noted that the downturn has led some government asset owners to become more risk-averse due to the potential career risk associated with a single year loss, even if long-term objectives are met.
“As a result, some are shifting from traditional 60/40 portfolios to ones with an overlay structure or tail risk hedge strategy to protect against significant downturns,” he said.