In November we assessed the traditional 60/40 Balanced portfolio and the value of fixed income/bonds, given its poor performance during 2022. With the evolutionary nature of markets worldwide, can fixed income can be relied upon in the future, as it has in the past.
The New 60/40
Diversification isn’t dead – it’s just hard to come by. The old days of having a well-diversified portfolio with a split of 50 to 60% growth (read ‘equities/property’) and 40 to 50% defensive (read ‘fixed income/cash’) seems not to be quite as adequate anymore. Each investment cycle seems to have its asset class casualty – for the investment cycle leading up to the GFC it was a structured product, for the investment cycle leading up to COVID it was ‘alternatives’ (namely, expensive hedge fund products). Will fixed income be the asset class casualty of the latest – albeit very short – investment cycle (or, more likely will it be cryptocurrency)? Only time will tell
but the reality is that we, like many others, are looking for the income-generation / diversification benefits once sought from fixed income, in other assets – namely, illiquid products. Are well-diversified 60/40 portfolios of the future likely to have an adroit mix of traditional ‘growth’ assets like equities making up the ‘60%’ while illiquids and cash (for liquidity purposes) make up a majority of the ‘40%’. It certainly seems that way. As an investment committee we are always reviewing these trends and opportunities, continually considering how we categorize ‘defensive’ assets. Many illiquids these days are classified as ‘growth’ given their asset base even though they behave much more like ‘defensives- and indeed, this is what investors are seeking from these exposures (strong, stable returns that are uncorrelated to the ups and downs of the equity market).
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