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The 60/40 portfolio is facing renewed criticism from one of its perennial naysayers: the investment bank analyst. And after several years of overly bleak predictions, on this occasion there is at least some data to support these concerns.
In the US, the classic balanced portfolio endured one of the worst quarters since the 1960s in Q1, according to Goldman Sachs. As we reported at the time, fixed income’s mid-March blip helped derail the usual inverse correlation between equity and safer bonds. Central bank intervention helped reset the dial, but some allocators are still nervous.
As the FT reports today, the proportion of managers who view government bonds as the best hedge against equity sell-offs dropped from 52 per cent in March’s Bank of America survey to 22 per cent this month.
Wealth managers have moved in the other direction in recent months, gradually adding back to government debt as alternatives disappoint. Our asset allocation database suggests a degree of scepticism resurfaced in March, but nothing like the shift reported by BofA.
With Goldman now cautioning against 60/40 strategies once again, and some investors suggesting the answer may be simply to buy more equities and “hold on tight”, Bank of America has an alternative suggestion. It’s raised its gold price target from $2,000 to some $3,000 on the back of the latest round of unprecedented central bank stimulus – even though inflation looks a long way off at the moment.
Gold has indeed outperformed every other asset class this year, despite its own wobble in mid-March. But like bonds, it hasn’t moved in the opposite direction from equities in recent weeks. BofA views that as a positive, saying it suggests either equities haven’t bottomed or gold has further to run.
One reason why allocators – UK wealth managers among them – remain underweight is that gold will never realistically form a big part of a balanced portfolio. The largest weighting to bullion in a UK DFM Balanced portfolio is just 7.5 per cent. A perfect solution to the end of 60/40 isn’t yet within reach for discretionaries.
Mountains and molehills
Despite their various imperfections, safe havens were unsurprisingly popular with wealth managers last month. When sell-offs occur, many are still looking to cash as their first port of call. Preliminary findings from our asset allocation database shows that the average cash weighting in a Balanced portfolio rose from 5 per cent at the start of the first quarter to 6.5 per cent as of the end of March.
The finer details of this shift are more revealing still. DFMs now largely sit in one of two camps when it comes to cash: they either have a little, or a lot – nothing in between. Almost 50 per cent of discretionaries in our database hold less than 5 per cent in cash; the other half hold 8 per cent or more. The chart below illustrates this split via a representative sample of portfolios:
Nor did those who were already sitting on large cash piles opt to invest in March. Of the small group who already held 8 per cent or more coming in to 2020, all but one increased weightings further in Q1. And the one holdout maintained their existing position rather than reinvesting amid the March sell-off.
So while cash is still a tactical play for wealth managers, and some are likely to have dipped toes back into the water amid April’s rally, there was a reticence to buy the dip last month. An alternative point of view is that more DFMs now agree that real diversifiers are few and far between at the moment.
Fund flow figures published earlier this week may suggest that allocators are moving away from actives in their droves, but not all data says the same. Research from NMG Consulting, surveying 209 advisers at the start of April, has found 40 per cent expect to cut their allocations to passives in the coming months – with 15 per cent of respondents anticipating those cuts to be significant in scope.
There are two ways these findings can be reconciled with the fund flow data. One is that allocators have been buying into passives as a short-term option, to give them the time to figure out where to place client cash over the longer term. The other is that advisers – and DFMs – are increasingly out of sync with the wider investment market in their preference for active managers during a downturn. Needless to say, a split of this kind will create as many opportunities as it does risks for those in charge of client money.