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The typical 60-40 balanced fund is simply “naive diversification” and insufficient to defend an epic bond sell-off, such as that witnessed this year at the hands of aggressive central bank tightening.
A balanced fund is industry shorthand for an asset allocation that is 60 per cent shares and 40 per cent bonds. It is founded on the belief that when equities are in trouble, bond prices will rally in an instinctive flight to the safety of fixed income returns.
But that did not happen this year, Atrium chief investment officer Tony Edwards observes, and nor was it the first time bonds and shares were punished in a similarly painful fashion.
“What we’ve seen this year with 60-40 portfolios and really conservative portfolios having deep negative losses, is the interest rate risk – which is the primary risk that’s played out in markets this year – hasn’t been confined to fixed income portfolios,” the CIO says.
Assuming that interest rate risk lies strictly within the confines of a fixed income portfolio is “very naive”, he says. That is because when interest rates were zero, investors were not getting paid for the risk they were taking.
This is an extract from an article written by Vesna Poljak for the Australian Financial Review, published on 12 January 2023
Read the full story: Why the 60/40 balanced fund is an endangered species - Australian Financial Review
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