MARKETS & INVESTING
60 / 40 ISN ’ T DEAD – IT JUST NEEDS A RETHINK
Francis Chua Fund Manager Legal & General Investment Management ( LGIM )
In the ever-evolving landscape of investing , the traditional 60 / 40 portfolio has long been hailed as a beacon of diversification . But as markets continue to shift and new opportunities arise , it ’ s becoming increasingly evident that a one-size-fits-all approach may not suffice . We believe it ’ s time for investors to rethink their diversification strategies . Let ’ s explore why the conventional wisdom surrounding the 60 / 40 portfolio may no longer hold water in today ’ s market environment .
Bonds go back to the future We ’ ll begin with government bonds , a common allocation in many multi-asset portfolios , including the 60 / 40 portfolio . As at the end of April 2024 , the yield on the US 10-year government bond was 4.68 %¹. For the past eight months , yields have averaged over 4 %. For context , the last time this happened was back in 2007 . There ’ s little need to repeat what happened in the years following the global financial crisis , but what is important to note here is the difference in market environment that we see regarding government bonds today . A key part of that difference is clearly inflation . Bonds , and in particular nominal government bonds , have seen resulting yields rise as inflation has risen from the lows of 0.1 % in May 2020 ( US CPI ), to the peak of 9.1 % in June 2022 . A buy-and-hold government bond investor would have seen a negative return over that period , to the tune of around 15 %². Why does this matter ? The point here isn ’ t necessarily about why bonds performed poorly , but rather around diversification .
The correlation conundrum Bonds have traditionally exhibited a negative correlation to risky assets like equities . That is to say , bonds have tended to move in the opposite direction , i . e . when equities fall in value , bonds typically rise in value . For a multi-asset portfolio , this negative correlation is beneficial during equity down markets . The chart below illustrates that relationship going back to January 2000 , using US equities and US Treasuries as the two assets of interest . As shown on the chart , the correlation between equities and bonds does tend to move around , so it is not necessarily a stable relationship ( one of the reasons we believe in being active in keeping portfolios diversified ), but on average , over this long-term period , the correlation was -0.28 .
¹ Source : Bloomberg , data as at 30 April 2024 2 Source : Bloomberg , data from 31 May 2020 to 30 June 2022
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