Is the 60/40 portfolio really dead? Newton Investment Management Head of Mixed Assets Investment Paul Flood and Portfolio Manager Simon Nichols see diversification and yield potential in bonds and certain areas of equities markets .
The bond bear market may have been seen as the final nail in the coffin of the 60/40 portfolio, but the Newton multi-asset team are re-evaluating this notion at a time when it sees pockets of opportunity in both bond and equities markets.
Newton head of mixed assets investment Paul Flood thinks bonds have been uninvestable for much of the past decade, but he says the effect of recent geopolitical and market events on bond yields has made the asset class a potentially viable part of the multi-asset team’s toolkit.
“Rather than comment on the death of the 60/40, we think it is time to re-evaluate the 60/40,” says Flood. “Bond yields bottomed out over a decade ago and we have clearly broken out of that downtrend, and we see better opportunities to benefit from bond market diversification in portfolios than in the recent past.”
Bond opportunities
The multi-asset team has increased bond exposure across portfolios over the past few months. As well as US Treasuries and gilts, the team has added government bonds from Australia, New Zealand and Canada to the portfolio. Flood also notes inflation-linked bonds have returned to positive real yields, leading the multi-asset team to add US index-linked bonds while reducing the weighting in gold.
In addition, the team has seen prospects in the sterling credit market, adding to investment grade bonds on the back of the fallout from the recent liability driven investment (LDI) crisis in which pension funds were forced sellers of certain liquid assets to meet cash obligations related to liability hedging strategies.
Regime change
Newton multi-asset portfolio manager Simon Nichols says the ‘tectonic shift’ higher in real bond yields has impacted how assets across the board are valued. At the same time, he notes Russia’s invasion of Ukraine has exacerbated inflation while simmering tensions between US and China could have significant implications for manufacturing, particularly in industries like technology and semiconductors.
“We feel like we’re on the on the precipice of regime change, not just from a valuation perspective, but from a geopolitical and balance of trade perspective,” says Nichols.
In the face of this regime shift, Nichols notes certain themes the multi-asset team is exploring in portfolios. One of these is healthcare on the belief certain companies in the sector have the potential to produce stable income streams propelled by a growth tailwind of ageing populations and improvements in healthcare technology.
Flood also notes a potential boost to the healthcare sector thanks to a likely increase in elective surgeries postponed during the pandemic. “Those individuals, unfortunately, are coming into hospitals with much more progressed diseases which should lead to both an increase in the number of surgeries and the consumables that go along with those surgeries,” he adds.
Flood also points to a ‘long-term structural growth opportunity’ within music streaming that he thinks is perhaps not being fully appreciated by the market that he thinks has extrapolated concerns over subscriber growth in some of the video streaming platforms.
“Our view is that there is a huge opportunity in terms of penetration of music subscriptions globally and there is an opportunity for continued subscription growth,” he says. “People don’t tend to watch the same movie every weekend, but the average consumer spends 18 hours a week listening to music and it tends to be the same music each week.”
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