Bond returns — and risks — aren't what they used to be, BlackRock strategists say. (Photo: Shutterstock)
The traditional 60/40 portfolio, which has been under attack from many of the biggest financial firms, will not only fail to deliver the moderate returns of the past but actually increase investment risk, according to BlackRock strategists.
Patrick Nolan, senior portfolio strategist at BlackRock who studied about 20,000 advisor-plus portfolios, said in a recent 2021 Outlook webinar that the average advisor portfolio is about 25% more volatile as measured by the company's Aladdin risk management system than it was a year ago, even though the asset allocation of the average moderate portfolio retained a 60/40 stock/bond split.
Three-quarters of the equity sleeve of that portfolio is in U.S. securities — the highest percentage in five years — and sharply exceeds the 57% weighting in the MSCI All Country World Index (ACWI). The bond portion of the average moderate portfolio had its longest duration in years, making it more sensitive to interest rates changes.
'Near Zero' Bond Returns
While long-duration bonds will lose more value than shorter-duration bonds when interest rates rise, they will gain more when interest rates fall, but that gain will now be limited because rates are already so low that they can't fall much further. (Federal Reserve Chairman Jerome Powell said in a recent webcast that the time for rate hike "is no time soon.")
Given these low yields and low expected return, bonds are not expected to provide the same ballast to portfolios as they have in the past, Nolan said. The typical 60/40 portfolio will likely return 4% to 6% less in annualized returns currently than it did over the past 10 years, which requires that advisors redesign portfolios, to something like 50% stocks/30% bonds and 20% alternatives, said Nolan.
Jeff Rosenberg, a portfolio manager of systematic fixed income at BlackRock, crystallized the argument against a 40% allocation of bonds further: Its expected return is near zero. Despite a recent jump in long-term Treasury yields, the increase in rates overall will be limited because the government, which has taken on much more debt in its war against COVID-19, needs to keep debt financing costs in check. It needs to pay interest rates below the level of nominal GDP plus inflation, Rosenberg said.
In addition to moving away from 60/40 traditional balanced portfolios, the BlackRock webinar included other portfolio recommendations for advisors to consider this year.
