The traditional ‘balanced’ portfolio consisting of 60% equities and 40% bonds has made headlines recently, as investors question if there is still life in the investment strategy. The BlackRock 60/40 Target Allocation Fund fell just under 16% in dollar terms in 2022; this was the second worst on record behind the 2008 financial crisis. This allocation has been incredibly popular over the decades, and even adopted by several wealth funds such as in Norway, due to a number of supposed benefits:
- Diversification: This split provides ballast due to the historical negative correlation between equities and bonds.
- Stability: Bonds tend to be less volatile than equities and can provide stability to the portfolio during market downturns.
- Potential for growth: The 60% allocation to equities allows for potential capital appreciation, which can help the portfolio grow over time.
- Regular income: Equity dividends and bond coupons provide a regular stream of income which can help to meet current cash flow requirements
However, 2022 saw bonds and equities move in lockstep as the historical negative correlation between the two broke down and became increasingly positive. This led to the deterioration of the diversification benefits that investors once expected from this strategy (Figure 1).
The underperformance of the 60/40 portfolio was propelled by the Fed’s first pivot from close-to-zero interest rates to a regime of rate hikes. This saw equities plummet from their highs in 2022. Government bond prices also fell, and due to their low yields for much of this time, they failed to provide sufficient interest payments to cushion investors from capital losses.
Our approach in the ACUMEN Portfolios helped shield investors through the use of Titan’s commodity overlay & active currency management strategy. We felt that by deviating from the 60/40 portfolio we could provide greater diversification to investors via exposure to sources of uncorrelated alpha.
For example, throughout most of 2022 the ACUMEN Portfolios had an allocation to the iShares Bloomberg Enhanced Roll Yield Commodity Swap ETF, which provides indirect exposure to a broad-basket of commodities (with a mechanism to control inherent futures pricing volatility).
This position benefitted from structural demand and supply-side drivers that saw commodities outperform on a relative basis. Figure 2 highlights the benefits that accrued from a revised allocation which outperformed the 60/40 portfolio by approximately 3% that year.
Towards the end of 2022, Titan’s CIO John Leiper made the case, in the linked ETF Stream article, for a potential rotation back to the 60/40 portfolio, predicated on higher bond yields and correlation reversion. That’s exactly what has played out so far this year, with equities and bonds rallying across the board on declining inflation. We benefited from this by taking profit on the aforementioned position at the end of 2022, locking in approximately 35% outperformance relative to the a global equity index.
That said, we haven’t pivoted fully back to 60/40 and we currently retain a meaningful allocation to gold across the ACUMEN Portfolio range. Titan’s Physicals portfolio manager Jonah Levy, CFA recently authored an article on our positive sentiment towards gold in the current economic climate which can be read here.
This is consistent with our market outlook, which is focused on the clear disconnect between central bank communication and current market pricing, and begs the question – are investors overestimating the ability of the Fed, and other central banks, to deliver meaningful disinflation whilst also achieving a soft economic landing?
Given the highly uncertain economic outlook, at least some exposure to alternative assets, like gold, may prove prudent by providing investors with alternative sources of risk-adjusted returns.
David Chandler
