Investors rethink ‘60/40’ as low bond yields test portfolios

NEW YORK: The staple US portfolio of 60% equities and 40% fixed income proved resilient this year, but strategists are now considering alternatives to government debt after some bond yields reached historic lows.

Sanford C. Bernstein recommends taking more risk by favouring stocks and gold, and argues the negative correlation between equities and fixed income is likely to unwind. Morgan Stanley said corporate bonds may be the best alternative to sovereign notes for curbing portfolio volatility and providing a level of income.

“I don’t think bonds can provide the standard historical returns investors are used to,” said Andrew Sheets, Morgan Stanley’s chief of cross-asset strategy in London.

“The starting yield is at a point where that type of return is just not possible. Investors are going to have to lower expectations of 60-40 portfolios, and will have to look elsewhere for what can be in the 40%.”

Blending stocks and bonds, a decades-old investment staple to balance risk and reward, is being tested by ultra-low yields. Five-year Treasury yields fell to a record after the Federal Reserve last week delivered a dovish message of support for the coronavirus-stricken US economy.

The S&P 500 index is up about 1.3% in 2020 after rallying sharply from March’s pandemic-induced plunge. Governments and central banks have provided US$11 trillion in stimulus and other support, including slashing borrowing costs and deploying unconventional policies to counter the impact of the health crisis.

Investors don’t have many other options to generate income aside from dividend stocks, with the gap between US dividend yields and bond yields at the widest in more than six decades, said Inigo Fraser Jenkins, head of global quantitative strategy at Sanford C. Bernstein in London. “If asset prices are high maybe income is more important, but then how to find that income?” he said. “We think the end result is investors will have to take more risk.”