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Portfolio > Portfolio Construction

More Reasons to Rethink the 60/40 Portfolio

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The traditional 60/40 portfolio, which has been under attack from many of the biggest financial firms, will not only fail to deliver the moderate returns of the past but actually increase investment risk, according to BlackRock strategists. 

Patrick Nolan, senior portfolio strategist at BlackRock who studied about 20,000 advisor-plus portfolios, said in a recent 2021 Outlook webinar that the average advisor portfolio is about 25% more volatile as measured by the company’s Aladdin risk management system than it was a year ago, even though the asset allocation of the average moderate portfolio retained a 60/40 stock/bond split.

Three-quarters of the equity sleeve of that portfolio is in U.S. securities — the highest percentage in five years — and sharply exceeds the 57% weighting in the MSCI All Country World Index (ACWI). The bond portion of the average moderate portfolio had its longest duration in years, making it more sensitive to interest rates changes.

‘Near Zero’ Bond Returns

While long-duration bonds will lose more value than shorter-duration bonds when interest rates rise, they will gain more when interest rates fall, but that gain will now be limited because rates are already so low that they can’t fall much further. (Federal Reserve Chairman Jerome Powell said in a recent webcast that the time for rate hike “is no time soon.”)

Given these low yields and low expected return, bonds are not expected to provide the same ballast to portfolios as they have in the past, Nolan said. The typical 60/40 portfolio will likely return 4% to 6% less in annualized returns currently than it did over the past 10 years, which requires that advisors redesign portfolios, to something like 50% stocks/30% bonds and 20% alternatives, said Nolan. 

Jeff Rosenberg, a portfolio manager of systematic fixed income at BlackRock, crystallized the argument against a 40% allocation of bonds further: Its expected return is near zero. Despite a recent jump in long-term Treasury yields, the increase in rates overall will be limited because the government, which has taken on much more debt in its war against COVID-19, needs to keep debt financing costs in check. It needs to pay interest rates below the level of nominal GDP plus inflation, Rosenberg said. 

In addition to moving away from 60/40 traditional balanced portfolios, the BlackRock webinar included other portfolio recommendations for advisors to consider this year.

Sustainability Is Transforming Investing

BlackRock CEO Larry Fink,  who has championed sustainability as “the new standard for investing” and climate risk as investment risk, said interest in sustainable investment has accelerated among BlackRock clients around the world and he expects more pension funds will invest only in customized sustainable indexes in the future.

Sustainable investing, said Fink, is as transformative to investing as securitization was in the late ‘70s and ‘80s.

With that growing interest in mind, BlackRock this week took a minority stake in sustainability analytics and data sciences Platform Clarity IT, which will be integrated into its Aladdin operating system.

Fink said he is still a globalist who sees great opportunity for investing around the world.

Chinese Stocks, Non-U.S. Markets

Kate Moore, head of thematic strategy, global allocation at BlackRock, recommended that advisors consider allocations to Chinese stocks trading in Hong Kong or as A shares trading in China, especially of those companies catering to Chinese consumption. Such shares are an “excellent portfolio diversifier,”  said Moore, noting also that China, with its economy is back online sooner than other economies that have suffered from the coronavirus pandemic, will remain part of the global supply chain in the near term.

She noted when considering non-U.S. index products advisors should dig into the sources of revenues included in those indexes because they’re not always what you’d expect them to be. About one-quarter of the revenue in the MSCI Europe Index comes from the U.S. and includes more revenue from Chinese companies than French companies, Moore said. 

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