To the surprise of critics who have long been calling for the demise of the this strategy, balanced portfolio’s of stocks and bonds have performed well in 2020
A balanced portfolio of stocks and bonds for decades was among the few venerated precepts in investing. Yet doubts about the approach grew after the pandemic hit and turned 2020 into a year like no other.
But for all the handwringing, in reality it looks like it will be another year of solid performance for 60/40. A model portfolio composed of 60% U.S. stocks and 40% bonds has climbed 13% year-to-date, according to a Bloomberg index. That’s in line with the rally in the S&P 500 Total Return Index and bigger than the 3.5% gain in the HFRX Global Hedge Fund Index.
The strategy’s resilience is a rebuttal to the many critics who have been calling for its demise for some time. Late last year, Morgan Stanley predicted a period of anemic returns for a typical 60/40 portfolio, and this year, a debate began on potential alternatives to bonds in the strategy as yields slumped to historic lows.
The argument went that bonds can’t be a hedge against equities if they both rise and fall together. But that’s a misunderstanding of the concept of 60/40 investing, one meant to result in a diversified portfolio for the longer-term investor, not a short-term focused absolute-return hedge fund.
Even over the short-term, a blended portfolio has proved resilient. At the height of the coronavirus fears in March, the Bloomberg 60/40 portfolio fell less than the S&P 500 Index — a sign of the benefits of diversification in action.
Still, caution abounds about a balanced approach. Deluard, who earlier this year warned of a “nuclear winter” for 60/40 portfolios harking back to the decade-long bust in the 1970s, said the strategy faces tougher times ahead.
JPMorgan Asset Management recently cut its expected returns for a 60/40 portfolio to 4.2% for the coming years, though it also lowered growth forecasts for global-equity portfolios to 5.1%.
For Societe Generale SA strategist Solomon Tadesse, the deflationary pressures unleashed by the coronavirus pandemic and the unprecedented monetary-policy response it triggered are likely to result in lower correlations between various asset classes going forward. That should benefit 60/40 investing, he said.
“The skepticism on 60/40 and more generally cross-asset performance was misguided as it did not account for the huge tailwind behind asset-return correlations,” Tadesse said. “I do expect the strong performance of the strategy to continue.”