Falling returns challenge case for the 60/40 portfolio strategy

The idea is to provide protection against dips, market downturns and economic collapses to some extent and at the same time generate growth, as the strategy is biased towards equity.

However, in recent years this style of allocation has come under criticism globally. The main concern has been the low yields of the debt portfolio. Loosened monetary policy and stimulus injections to deal with the covid pandemic have left over $ 17 trillion in negative yielding bonds.

According to a report by JP Morgan Asset Management, the impact on government bond yields of ultra-low interest rates is clear: over 85% of developed market government bonds have a yield of less than 1% and about 35% offer negative returns.

Some experts say the 60/40 style does not match the Indian context. “60/40 is a very American concept, and very few in India will have 60% of their money in equity. The reason the adoption of the strategy is higher there is that in the United States people don’t have employee provident funds and the yields on debt are quite low, ”Mrin said. Agarwal, founder of Finsafe India Pvt. Ltd.

We take a look at whether Indian investors should follow this classic approach and the main challenges facing the strategy.

A 60/40 portfolio takes a more or less static approach, rebalancing at that proportion if a rally or decline in the stock or bond market moves the portfolio away from that ratio.

For example, if a rally in the stock market brings the weight of the stocks in the portfolio to 80%, the investor would sell the excess stock in such a proportion that the 60/40 composition is restored. This corrective action therefore acts as a security breach in the face of market reversals or irrational exuberance.

Investors can follow this approach either by investing in segregated equity and debt funds or by investing in hybrid funds. The advantage of the latter is that rebalancing within the hybrid fund does not attract an exit charge or tax.

On the other hand, the investor cannot choose the market segments (large caps, mid caps, etc.) when taking the hybrid route.

Srikanth Meenakshi, co-founder of PrimeInvestor, who has used the 60/40 strategy for 10 to 15 years for his own retirement portfolio, says it is a classic long-term portfolio with moderate risk. Meenakshi’s vision for a 60/40 portfolio also includes international funds and gold.

“A 60/40 portfolio would typically look like 20% large cap, 30% a mix of flexi-cap and mid-cap categories and around 10% international equities, plus 20-30% debt and the rest 10 -20% in gold, depending on investor’s preference for gold and international allocation. This allowance has multiple compensating factors to protect against falls. It’s growth-oriented, but has important protective elements, ”Meenakshi said.

The effectiveness of the 60/40 strategy depends more or less on the prospects for debt and equity. In the Indian context, experts say that we are in a very difficult situation in terms of economic growth. Due to the blockages located in the country, the Reserve Bank of India is very determined to revive growth. Therefore, experts believe that the liquidity will be in excess for some time.

“The returns on the debt side are going to be slow. The 10-year bond yields will be around 6%, which means 5-6% returns for investors for about a year until the closings and the covid situation subside, ”said Rushabh Desai, a Mumbai-based mutual fund distributor.

According to Desai, a 50/50 wallet would be the perfect break for a wallet. “However, since we don’t see a lot of return on the debt side, a 10-15% higher equity allocation can really help average debt and yield more returns,” he said. -he declares.

Investment advisers say that in building a portfolio it’s hard to determine what a rule of thumb is and that asset allocation stems from an investor’s financial goals.

“For a young investor, the underlying investment might be 75-80% stocks and the rest of debt, but if someone is looking at the money over the next two or three years, it might be. ‘act almost 90% of non-actions. The financial goals of the investor are also a factor. The overall portfolio operates on the basis of the asset allocation suggested for each financial goal. So the core asset allocation is nothing more than the sum of all asset allocations of all financial goals, ”said Harshad Chetanwala, Sebi registered investment advisor and co-founder of MyWealthGrowth.

Amol Joshi, founder of Plan Rupee Investment Services, a Mumbai-based mutual fund distributor, strongly opposed a higher equity allocation due to low returns.

“The determinant of asset allocation is risk appetite and not expected return. Yes, bond yields have come down, but so has inflation. I don’t see a reason to make someone invest more in stocks just because of falling bond yields, ”he said.

A 60/40 portfolio is a good rule of thumb, but an investor should also consider their age, financial goals, risk appetite, and outlook for the debt and equity markets when choosing. asset allocation.

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Don F. Davis

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