Manulife Investment Management, in one of its most recent notes to investors, discusses the factors influencing the effectiveness of a traditional 60/40 portfolio of equities and fixed income.
“Market commentators have devoted much energy over the past year to debating whether it’s time to write off the traditional 60/40 approach to investing,” they write. “Rather than being drawn into that discussion, we believe it is more constructive for investors to focus on understanding the macroeconomic conditions under which the effectiveness of a 60/40 portfolio may be challenged.”
Their discussion, Five factors influencing the effectiveness of a 60/40 portfolio, suggests that inflation, uncertainty and lower liquidity can lessen the benefits of a typically constructed portfolio. It looks at the correlation between stocks and bonds, and when they can become somewhat correlated. “Having a better sense of when these dynamics could come into play can potentially make a material difference to returns,” they state.
Their analysis showed that the efficacy of the 60/40 portfolio can be diminished during periods of higher inflation, particularly when inflation surpasses three per cent.
“The same occurs during periods of deteriorating liquidity and – somewhat counterintuitively – in times of sudden and massive liquidity injection, typically occurring in periods of monetary policy stimulus. Encouragingly, the expected relationship between stocks and bonds asserts itself during periods of economic slowdown,” they add. “Ultimately the strategic use of the right tools at the right time is of utmost importance.”
