With soaring Treasury yields punishing bond returns, the viability of the classic 60/40 equity/fixed income portfolio is stirring considerable debate.
That’s not surprising. If aggregate bonds strategies are struggling against the backdrop of rising 10-year yields, it’s reasonable to expect advisors and, for that matter, clients to question the efficacy of a portfolio that devotes 40% of itself to fixed income.
Yet data suggests it’s probably too early to author 60/40 obituaries.
“Vanguard Balanced Index (VBAIX), a fund with a strategic 60% allocation to the U.S. total stock market (the CRSP U.S. Total Market Index) and a 40% allocation the U.S. total bond market (the Bloomberg Barclays U.S. Aggregate Bond Index), gained 2.4% for the first quarter of 2021,” writes Morningstar’s Jason Kephart. “That was in line with the fund’s 2.3% median quarterly return since 2000.”
Obviously, VBAIX is just one fund, but its first quarter showing is notable because its 40% bond sleeve is almost entirely allocated to core bonds, which were punished in the January through March period. Conversely, the fund’s exposure to fixed income segments that can thrive as yields climb is light.
“Within the context of the past 20 years, the 60/40 fund’s 2021 first-quarter performance was a snoozefest,” notes Kephart. “That’s despite the 40% of the portfolio invested in U.S. core bonds, which had their worst quarterly performance since 2000. The bond portfolio suffered a 3.6% loss for the quarter as intermediate-term interest rates hit a post-coronavirus-pandemic high on March 19, 2021.”
A quibble naysayers are sure to bring up is that investors can’t expect stocks will rise every time Treasury yields do, the same as was the case in the first quarter. Point being, there are periods when equities and bonds decline in unison and those stretches are rough on 60/40 portfolios.
“Investors shouldn’t expect stocks to surge every time interest rates rise, but the good news is that now that interest rates are no longer flirting with all-time lows, future rate increases should be less painful with higher starting rates,” concludes Kephart.
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