Grim Diagnosis for the 60/40 Portfolio, Says $5Tn CIOs

The consensus of participants in the CityWire CIO Summit, held in May, was that the 60/40 portfolio may not be dead, but “its condition appears to be critical.”

The Summit brought together CIOs from Amundi, Franklin Templeton, JPMorgan, LGIM and TRowe Price, who collectively oversee nearly $5 trillion in assets.

“Their pessimistic prognosis for the classic balanced portfolio was based on a dire outlook for bond yields,” the article reports, “already pushed low by loose monetary policy and now under pressure from inflation.” An expected uptick in inflation will further erode yields, “raising more questions over the role of bonds in the classic balanced portfolio.”

Here are some takeaways from the CIO’s comments:

Sonal Desai, CIO of Franklin Templeton Fixed Income, said it is premature to say that the 60/40 portfolio is dead, but argued that it was “not ideal positioning for the current environment.” She predicted that inflation would not return to 1970s levels but would exceed the Fed’s target of 2% and probably be closer to at least 3%–leaving Treasury investors short.
Pascal Blanque, CIO of Amundi, believes that the 60/40 portfolio is “reasonably dead” due to the changing role of bonds: While he believe they could still provide liquidity, additional income would have to be found from other asset classes. Since he believes we are headed for more positive correlation between equities and bonds, the challenge will come in finding new diversifiers, he said.
Sonia Laud, CIO at LGIM, agreed that investors will need to find alternative asset classes to deliver income, diversification, and downside protection in a 60/40 portfolio.
David Giroux, who oversees the T.Rowe Price Capital Appreciation fund, said he rarely had 40% exposure to traditional bonds, adding that other asset classes (i.e., leveraged loans and covered calls) could offer better risk-adjusted returns than traditional bonds.
Paul Quinsee, JPMorgan’s global head of equities, argued that equity yields were also low due to high valuations and that the 6% annual returns we’ve seen over the last 30 years will not continue.

The article concludes with Desai’s contention that dire projections may be too hasty, and that a new economic cycle could usher in higher yields at some point and the 60/40 portfolio “wakes up.” She adds, “It’s probably not dead. That might be premature.”