Debate over 60/40 portfolio rolls on despite BlackRock stance

Investors keen to keep an eye on their own investment portfolio can still rely on the basic wisdom of a 60/40 weighting to equities and bonds despite the recent souring of sentiment towards it, industry participants say.

BlackRock warned at the end of April that, despite the recent rebound for this classic investment approach, investors should now buy a wider range of assets, but its biggest rival provider of exchange traded funds insists the traditional portfolio still has good long-term prospects.

Research from Vanguard dating back to 1977 shows last year was a historical anomaly for the 60/40 portfolio in that it was the only year in which both equities and bonds sank in value — delivering double-digit losses.

In every other year, either both were in positive territory or gains in one offset losses in another.

Roger Aliaga-Diaz, Vanguard’s chief economist for the Americas and head of portfolio construction, maintains that knee-jerk responses to market upsets are unwise.

He points out that over the 10 years to the end of December a classic 60/40 portfolio would have delivered an annualised return of 6 per cent. Over the past four years that figure would still have been 5.9 per cent and the Vanguard Capital Markets Model projection for the next 10 years as of the end of December was for returns of 6.1 per cent.

“The correction last year was so strong, it’s partly why we’re so optimistic,” Aliaga-Diaz said.

He said investors should see the 60/40 portfolio as a shorthand for strategic asset allocation, adding that the appropriate allocation may change over time as an investor’s unique circumstances evolve. “But the key for investors is to determine an appropriate asset allocation consistent with their goals, time horizon, and risk tolerance — and stick with it through the ups and downs of the market,” he added.

James McManus, chief investment officer of Nutmeg, a UK digital investment platform that offers managed portfolios constructed with ETFs, agreed.

“The 60/40 portfolio suffered a historically challenging year in 2022, but the framework is still as relevant today as it has always been for longer-term investors — albeit returns are unlikely to eclipse those of the distance past,” McManus said.

He said Nutmeg had recently increased its weighting to government bonds though it still remained underweight across its portfolios.

“There are still factors that make us cautious about the bond market — continued inflationary pressures, the wind-down of government holdings of their own bonds and the large debt created from Covid support programmes that extends fiscal risks,” McManus said.

His caution is reflected in a recent BlackRock release on rethinking the role of fixed income. It reiterated its earlier warning on the need for more portfolio flexibility and to rethink traditional portfolio construction.

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Brett Pybus, global co-head of iShares fixed income ETFs, said bond ETFs would be ideally suited to this new age of what BlackRock is calling the Great Yield Reset.

“Bond ETFs are a critical tool for portfolio managers, who need to be more nimble in changing market conditions,” Pybus said.

The conflicting advice means investors will need to hold their nerve whatever they decide to do. But Aliaga-Diaz argued that the “risk environment changes so fast that by the time you respond you might be a bit late”.

“We don’t want to get into the business of trying to time it,” he said.

“Abandoning a strategic allocation when the markets are volatile can cause investors to lock in losses and impair their ability to meet their long-term investment goals,” said Aliaga-Diaz.