Falling Yields Challenge Case for the 60/40 Portfolio Strategy

The idea is to provide protection against dips, market dips and economic meltdowns to some degree and at the same time achieve growth, as the strategy is biased towards equities.

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. Loose 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: more than 85% of government bonds in developed markets are yielding less than 1% and about 35 % offer negative returns.

Some experts say that the 60/40 style does not fit the Indian context. “60/40 is a very American concept, and very few in India will have 60% of their money in stocks. The reason the adoption of the strategy is higher there is because 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 examine whether Indian investors should follow this classic approach and the main challenges the strategy faces.

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

For example, if an equity market rally causes the weighting of stocks in the portfolio to increase to 80%, the investor will sell the excess stocks in such a proportion that the 60/40 composition is restored. This corrective action thus acts as a safety break in the face of market reversals or irrational exuberance.

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

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

PrimeInvestor co-founder Srikanth Meenakshi, who has been using the 60/40 strategy for 10 to 15 years for his own retirement portfolio, says it’s a classic medium-risk long-term portfolio. 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% in a mix of flexi-cap and midcap categories and around 10% international equities, along with 20-30% debt and the 10-20% remaining in gold, depending on the investor’s preference for gold and the international allocation. This allowance has multiple compensating factors to protect against falls. It is growth-oriented, but has strong protective elements,” Meenakshi said.

The effectiveness of the 60/40 strategy depends more or less on the outlook 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 localized lockdowns in the country, the Reserve Bank of India is very determined to get growth back on track. Therefore, experts believe that liquidity is going to be excess for some time.

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

According to Desai, a 50/50 portfolio would be the perfect breakout for a portfolio. “However, since we don’t see much return on the debt side, a 10-15% higher allocation to equity can really help average out the debt side and give more returns,” he said. he declared.

Investment advisors say that when it comes to portfolio construction, 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% equity and the rest debt, but if someone is looking at the money in the next two or three years, then it might be s act nearly 90% non-equity. The financial goals of the investor are also a factor. The overall portfolio works based on the suggested asset allocation for each financial goal. Thus, the allocation base asset is nothing but the sum of all asset allocations of all financial goals,” said Harshad Chetanwala, registered investment adviser with Sebi and co-founder of MyWealthGrowth.

Amol Joshi, founder of Plan Rupee Investment Services, a Mumbai-based mutual fund distributor, has come out strongly against a higher equity allocation due to low yields.

“The determinant of asset allocation is risk appetite not expected return. Yes, bond yields have come down, but so has inflation. I see no reason to move anyone further towards equities simply because of lower bond yields,” he said.

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

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Don F. Davis