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Home›Nominal return›Bonds can no longer play a role in multi-asset portfolios

Bonds can no longer play a role in multi-asset portfolios

By Adam Motte
March 21, 2022
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With higher and more volatile inflation, bonds offer a low yield and are unable to act as a counterweight to stocks in portfolios.

Therefore, a 60/40 portfolio no longer seems to be a viable solution.

In fact, holding bonds in a portfolio could even be counterproductive.

Orbis Investments investment adviser Rob Perrone said: “With yields of 1-2% on long term US or UK sovereign bonds, the bonds are not even producing enough income to cover expected inflation. .

“At current rates, bond buyers should expect to lose purchasing power over the long term.

“Although on the risk side, government bonds today carry substantial interest rate risk, and bond prices could fall by 8% or more if yields only rise by 1 percentage point. .

“Investors who have bought 10-year Treasuries or gilts over the past two years have already experienced some of these painful price drops.

“At current yields, we see long-term nominal bonds as risk without return and don’t think they have a role to play in multi-asset portfolios.”

In its annual white paper published in October 2021, retirement income planning firm Chancery Lane compared an all-stock portfolio, an all-bond portfolio, and a traditional 60-40 fund mix.

Chancery Lane then looked at how each portfolio’s capital position has changed over 10 and 20 years. The result was that the 100% equity investment outperformed the other two almost every year.

As it stands, £1 out of £4 could be invested in a 60/40 type strategy.

Perrone said: “Using funds from a single provider as a proxy, the IA 40-85% equity sector had £85bn in assets in January.

“Vanguard’s LifeStrategy 60% equity fund, by far the largest in the industry, has £13.5 billion in assets. The Vanguard LifeStrategy 80% Equity Fund, the second largest in the industry, has an additional £7.4 billion.

“Between the two, that’s around £1 in every £4 invested in the sector in a 60/40 type strategy.”

Orbis Investments has found opportunities in places that the classic 60/40 portfolio overlooks for its own multi-asset portfolios.

This includes value stocks, stocks outside of the US, inflation-linked bonds, and exposure to gold.

“Different tools can also help. By combining bottom-up stock selection with market hedging, we can provide exposure to our stock selections, but with less volatility and with returns that are not correlated to the general direction of the stock or bond markets,” added Perrone.

The Bank of England raised the key rate by 25 basis points to 0.75% yesterday (17 March).

The monetary policy committee voted 8 to 1, with only one member preferring to keep the discount rate at 0.5%.

The base rate is now at the highest level seen since March 2020.

Perrone added, “The last 30 years have been in ‘easy mode’ for investors. All you had to do was gain broad exposure to major asset classes, and that was enough to generate excellent risk-adjusted returns.

“In the future, generating good returns will likely be much more difficult and will require a more active approach.

“We are convinced that the time will come when bonds will become attractive again, but now is not the time.”

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