Expect a comeback of 60/40 portfolios, said Pictet Wealth Management’s Asia chief investment officer Hugues Rialan, proclaiming that the positive correlation between stocks and bonds in 2023 «will not be repeated».
Many balanced portfolios have traditionally adopted a «60/40» asset allocation strategy – 60 percent and 40 percent allocated to equities and fixed income, respectively – as a means of diversifying between asset classes with negative correlations. This allows investors to theoretically spread risk and avoid the scenario of complete wealth loss.
While this negative correlation has mostly maintained itself for the last two decades, the trend reversed in 2022 causing 60/40 portfolios to take a deep dive.
«2022 was one of the worst years on record for this strategy,» said Pictet Wealth Management’s Asia CIO and head of discretionary portfolio management, Hugues Rialan, in a recent briefing attended by finews.asia. «But as we know trends should not be extrapolated. And in this case, that is good news.»
No Repeat
The equity-bond relationship – measured as the two-year rolling correlation between the 10-year US Treasury and S&P 500 – has swung up and down during the 20-year period. This ranged from around -60 percent to 0 percent, including a one-time breach to nearly 20 percent in 2014-15. And in 2022, this correlation spiked to 50 percent.
«This will not be repeated,» Rialan said. «Over the last 20 years, basically, we were living in a world of negative correlation between equities and bonds. That’s a perfect world. Don’t expect positive correlations to stay with us.»
Investment Theme #1
In line with this view, Pictet has made the 60/40 portfolio strategy one of its top investment themes for 2023. The Swiss private bank believes that government bonds and equities will be moving «less in tandem» as the former is delivering attractive yields while the latter sees a drop in earnings expectations.
Its other top themes include opportunities from shoring activities in friendly countries; a shift from floating to fixed rate debt; changes in risk premia; focus on credit quality; 2023-2024 private asset vintages; and investing in volatility an asset class.
