Is it time to reverse the 60/40 allocation?

bonds fixed income PIMCO asset allocation portfolio construction

12 June 2024
| By Laura Dew |
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The secular backdrop for the next five years invites advisers to reverse the typical 60/40 per cent equity and bond asset allocations, according to PIMCO. 

In the firm’s annual 2024 Secular Outlook update, global economic adviser Richard Clarida, CIO for global fixed income Andrew Balls and global CIO Dan Ivascyn shared their insights into the fixed income markets. 

As the economy recovers from the pandemic aftershocks, outsize central bank interventions, prolonged inflation surges and severe market volatility, this has left some positive developments for bond investors, they said.

These included disinflation occurring more rapidly than anticipated into developed markets, inflation risks looking more balanced and central banks moving towards rate cuts rather than hikes.

It particularly viewed opportunities in asset-based lending, in commercial real estate debt and mortgage-backed securities. On the contrary, valuations appear stretched in equities and offer investors little apparent cushion, screening expensive on both an absolute basis and relative to US Treasuries. 

For the trio, this indicates that markets may be entering an era for sophisticated asset allocators to move away from the traditional positioning of 60 per cent equities and 40 per cent bonds. 

“For investors, the early 2020s inflation shock and steep policy rate hikes produced a generational reset higher in bond yields, which now embed significant inflation-adjusted cushion. Starting yields are highly correlated with five-year forward returns. 

“That supports an attractive long-term outlook for fixed income returns as inflation recedes, particularly on a risk-adjusted basis relative to other assets. Opportunities across global bond markets also appear uncommonly attractive and diverse, with active country and security selection being key,” the trio wrote.

“We believe this secular backdrop merits a rethinking – and even a reversal – of the traditional 60 per cent stocks 40 per cent bonds asset allocation paradigm.

“Today’s yields and a stabilising inflation outlook are enabling bonds to reassert their fundamental advantages in portfolios: providing potential for attractive income, downside resilience and stability through reduced correlation with equities.”

Investors should also prioritise credit selection and liquidity in their allocations which will become more important over a secular horizon.

“Given the high potential for returns in the more liquid segments of the bond market, investors should have a high hurdle – in the form of attractive return potential and strong lender covenants – for giving up liquidity. 

“At today’s yield levels, the risk-adjusted return potential of broadening exposure to public fixed income markets – such as increasing allocations to high-quality DM and EM bonds – also compares favourably with the trade-offs involved in extending into less liquid areas of credit markets.” 

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