60/40 portfolio more relevant than ever: State Street
Far from being the death of the 60/40 portfolio, fixed income strategist Marie Tsang believes it is even more relevant than ever in the current market environment.
Marie Tsang, fixed income strategist at State Street Global Advisors, poured cold water on the idea that a portfolio composed of 60 per cent equities and 40 per cent bonds is no longer a valid asset allocation.
Speaking to Money Management, Tsang said: “The 60/40 portfolio used to be relevant and I would say it is even more so now as yields have increased. Rather than looking back at performance, we should look forward and think about the yields we can get.
“Fixed income has a lot of variables that are known in advance as well compared to equities.
“We have told investors to look through the short-term volatility and hold for the long-term; investors are in a good place if they want to add or buy more bonds.”
She said there’s a 60 per cent chance there will be one more interest rate hike from the Reserve Bank of Australia (RBA) between now and the first quarter of 2024, which would likely be another 25 basis points.
Rates have risen by four percentage points since May 2022 but have sat at 4.1 per cent for four consecutive months as the RBA assesses the impact of the previous rate rises on the economy. However, consensus widely expects there will be at least one more hike before interest rates reach their peak.
Tsang said: “Inflation has been stickier than expected and there are lags in monetary tightening. The unemployment rate is low so that’s something to watch, but on balance, it is time to start looking at bonds.
“The RBA would need to see inflation closer to its target before it cuts rates, and it is a long way off that.”
The target inflation rate is 2–3 per cent, but CPI inflation rose 5.2 per cent in August which was higher than the 4.9 per cent recorded in July.
State Street runs two Australian fixed income ETFs: the $36 million SPDR S&P/ASX Australian Bond Fund and the $33 million SPDR S&P/ASX Australian Government Bond Fund.