CT brands 60:40 portfolio model as "too simple"

Speaking at the Columbia Threadneedle Multi-Manager team's 2024 outlook, manager Anthony Willis said: "60:40 portfolio models are too simple for diversification these days".

Bond yields across the piste have gone from a long period of low rates to a period of high rates, and this has naturally shifted the discussion towards the attractiveness of fixed income in 2023 to 2024.

For example, data compiled by Columbia Threadneedle team for the briefing showed high-yield bonds finished the year up 11.09 per cent, while corporate bonds ended 2023 up 9.31 per cent. 

But while managers and investors alike have welcomed the income stream created by rising bond yields, this does not mean that investors should think as simplistically as going back to having 60 per cent of their portfolio in equities, and 40 per cent allocated towards bonds.

Having bonds as a reasonable alternative for an investor looking to take some risk out is a welcome development.Carrier, RBC

As Rob Burdett, head of multi-manager solutions at CT, said, this did not mean every bond fund was worth putting into a multi-manager portfolio just to hit some sort of allocation target.

He said: "We think everything we own will deliver over five years. We don't carry passengers."

Having a more diversified portfolio, where every element plays an important part to meet long-term goals is all the more important, the team said.

Potential risks

This is especially important if one considers potential risks coming down the line, such as geopolitical tensions around the elections in many major economies - not least in the UK and US.

The team asked: "What happens if governments need to keep borrowing [by issuing bonds] to fund election promises?" Who will keep buying? This could be a risk that investors and governments alike need to keep an eye on. 

There is also the potential for interest rate rises and even inflationary pressures in 2024, given "wars and rumours of wars" across the globe, with the potential for disrupted trade routes putting upward pressure on inflation once more. 

The team pointed to the long-term trend for interest rates in the UK (as the graph using Bloomberg data shows). 

However, these cautious tones do not diminish the current attraction of fixed income. 

As Frédérique Carrier, head of investment strategy for RBC Wealth Management in the British Isles and Asia, said: "For the first time in more than a decade, bond yields have moved back up to levels that make fixed income a fully useable and attractive adjunct to equities in a balanced portfolio.

"Bonds provide, as they have traditionally done, a combination of reduced volatility, more predictable returns, and the comfort of a maturity value."

And there is still value in bond allocations for risk mitigation and portfolio balancing.

Carrier added: "If at some point a more defensive structuring for a balanced portfolio is called for, having bonds as a reasonable alternative for an investor looking to take some risk out is a welcome development."