Rethinking the asset allocation of traditional balanced funds

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Salt Asset Management presented its latest global outlook with the title; This will hurt.

Thursday, October 13, 2022, 10:20 a.m.

This gives you an idea of ​​what the fund management company’s brain is seeing right now.

Some of the key points are that they question whether the traditional 60:40 asset allocation in balanced funds to stocks and bonds respectively is fit for purpose in the current environment.

In the first three quarters of this year, all global asset classes posted negative real returns, with the exception of commodities.

“It is very rare for just one type of asset class to experience price gains over a full nine-month period,” they say.

In addition, the significant losses of bond funds had a marked impact on portfolio returns.

“So there are obvious issues with recommending the so-called ‘classic balanced’ asset mix of 60% stocks to 40% bonds under current market conditions.”

As the markets evolved, a typical US balanced portfolio would have posted real returns of -26% in the first nine months of this year.

It “would be the worst single-year result since 1931 (when the actual return was -31% for the full year in the depths of the Depression).”

They say the next two years will likely determine whether traditional asset allocation reverts to a beneficial diversification structure or is deemed insufficient.

They say the current bond bear market is the worst on record, in terms of negative total returns recorded across a wide range of debt securities.

The equity bear market, on the other hand, remains subdued by historical standards.

“Equities will recover, over time, but bonds face a more fundamental challenge due to still inadequate yield levels given inflation and credit risk and a new QE support environment ended and nascent steps to QT).”

Salt says there are no catalysts yet for a broad multi-market rally in stocks or bonds. However, towards the end of the year, we could see a stabilization.

Valuations are much better but high quality stocks are still heavily favored.

The manager maintains his central market view that equities will post average annual returns close to their long-term norms over the next three years, listed real estate assets have superior defensible returns and cyclical tailwinds. Salt prefers stocks over fixed interest or cash at the moment.

“The negative real (after inflation) yields that weigh on fixed income securities will persist for at least 18 months and continue to take fixed income asset class holdings much higher in an untimely way.”

Tags: asset allocation

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