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Bonds will no longer provide the same diversification benefit they did for much of the past few decades, when they tended to rise during equity sell-offs, according to BlackRock.iStockPhoto / Getty Images

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BlackRock Inc. has warned that a classic 60/40 portfolio will serve investors poorly over the long term, despite a simultaneous rebound for equities and bonds so far this year.

The “traditional investing approach” of a portfolio of 60 per cent stocks and 40 per cent fixed income has made a comeback this year from its biggest downturn in decades in 2022, according to a report from the BlackRock Investment Institute, the in-house research arm of the world’s biggest asset manager.

The strategy has been a cornerstone for many asset managers for more than 30 years. It’s based on the inverse correlation between bonds and equities and the assumption that when the price of one rises the other falls. But it was unlikely to work in a world in which big central banks were raising borrowing costs to curb rising prices, it said. Instead, investors should shift away from broad allocations to equities and bonds and buy a wider range of assets, including a substantial weighting in private markets.

“We don’t see the return of a joint stock-bond bull market,” the report said. “We think strategic allocations of five years and beyond built on these old assumptions do not reflect the new regime we’re in – one in which major central banks are hiking interest rates into recession to try to bring inflation down.”

A typical 60/40 portfolio declined 16 per cent in 2022, a performance that raised doubts about the viability of the strategy. Annualized returns over the decade ending in December 2022 were 6.1 per cent.

Bonds will no longer provide the same diversification benefit they did for much of the past few decades when they tended to rise during equity sell-offs, according to BlackRock.

Wei Li, global chief investment strategist at the BlackRock Investment Institute, says “being more nimble” was important in the current investing environment.

Rising geopolitical tensions, turmoil in the banking sector and the risks climate change posed would require more frequent adjustments to strategic asset allocation because of the need to respond to market shocks and new information, Ms. Li says.

BlackRock’s warning about the potential drawbacks of continuing to use a 60/40 balanced stands in marked contrast to the advice given by its closest rival, The Vanguard Group Inc. The world’s second-largest asset manager told clients last month that the outlook for the performance of a global 60/40 portfolio over the next decade has improved markedly.

Vanguard’s prediction is for a global 60/40 portfolio to deliver annualized returns of 6.1 per cent over the next decade, up from a forecast of 3.8 per cent made at the end of 2021 when the U.S. stock market was trading close to an all-time high.

BlackRock’s shift away from broad allocations to public equities and bonds will involve a bigger emphasis on stock picking with a greater focus on choosing companies in sectors such as energy and health care that are better placed to weather a recession and that can pass on higher prices to their customers.

It expects inflation to remain a persistent problem and is holding an “overweight” position in inflation-linked bonds as both a short-term tactical and long-term strategic position.

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