According to a research piece recently published by BlackRock, there have been only four occasions since the Great Crash of 1929 when bonds didn’t go up as the stock market melted away, and 2022 was one of those.
On that basis, BlackRock is suggesting that the classic 60% equity & 40% fixed income portfolio should now include an exposure to a market neutral long/short strategy in their quest to diversify the source of returns. Their key point is that it is time to diversify the exposure away from a pure directional play.
Are they right to fly the white flag as they move away from the tried and tested 60/40 asset allocation mix by favouring an allocation of 20% to an Alternatives strategy taken from the 60% equity bucket, or are they missing one of the best opportunities in a generation should Fixed Income returns continue with their strong re-bound?
No one doubts that 2022 will be remembered as the year when the 60/40 Model Portfolio became broken, but that disorder may well be behind us. Vanguard’s Life Strategy funds, which in many ways have become the benchmark for other providers to beat, suffered badly as exemplified by their LifeStrategy® 20% Equity Fund which lost 15.84% in 2022, whereas their LifeStrategy® 60% Equity Fund ‘only’ lost 11.22%. Looking at their factsheet, they have not chosen to move away from the 60/40 construction.
The view at Algo-Chain is that once you decide to break the 60/40 mould you may as well consider a whole range of options, but very quickly analysis/paralysis sets in, and given the vast range of ETF choices one can make, that choice starts to become overwhelming. For that reason, we prefer Vanguard’s simpler approach, with the caveat that one will try and introduce non-correlated allocations to diversify.
Using the Algo-Chain Model Portfolio platform we are able to monitor an extensive range of portfolio constructions, including those which include exposure to Gold and other commodities. On a YTD basis these Fixed Income/Equity/Gold portfolios have delivered the best performance. This is perhaps not surprising, after the invasion of Ukraine gold lost 17% over the next 7 months but since then has rallied over 20%.
Until next time.
Allan Lane