An actively managed 60/40 portfolio can deliver equity-like returns with half the volatility, according to Alexis Lavergne, fixed income investment specialist at Janus Henderson.
After the interest rate hikes of 2022 wreaked havoc on portfolios made up of 60% equities and 40% bonds, some pundits were quick to declare the popular asset allocation strategy dead.
However, Lavergne (pictured) argues that those who stick with the classic 60/40 strategy today are more likely to stay invested during times of extreme uncertainty.
Investors have been subject to wild swings in volatility so far this year as a result of shock tariffs announced by US President Trump, with equity markets seeing close to a 20% decline from its peak in February.
But those with a 40% allocation to fixed income investments would’ve endured substantially less volatility and therefore are more likely to stay invested, said Lavergne.
“If you are invested in a 60/40 portfolio during a market sell-off event where equities see a 15% decline, perhaps the overall portfolio will be down 8%,” he said. “That can help clients sleep well at night.”
Given how often the best days in the market are during periods of extreme uncertainty and pessimism, Lavergne emphasised the importance of spending time in the market rather than trying to time the market.
He pointed to the recent equity bounce of +9.5% on 9 April on the back of the tariffs “pause” which now marks the 10th largest positive one-day move in the history of the S&P 500.
“If you had been invested in equities throughout 25 years, you would have made eight times your money,” he said. “But if you missed the 10 best days, you would have made less than half of that.”
A simple approach
Although bonds failed to hedge equity investors during the 2022 interest rate and inflationary bear market, the higher yields on offer make the asset class a better diversifier today, according to Lavergne.
“Since last year, yields are in such a better starting place for portfolios, with more elevated nominal and real yield levels, which can provide investors with some degree of safety,” he said.
“Fixed income can act as the ballast that it’s supposed to provide – which it didn’t in 2022 due to the rapid rise of inflation – but we have always said this was an exception, not the rule.”
“It has only happened four times over the past 100 years that U.S. equities and bonds both delivered negative returns over a calendar year: 1931, 1941, 1969 and 2022.”
When US government bonds sold off sharply alongside equities in the days following tariff announcements, some investors were again calling into question their usefulness as a diversifier in 60/40 portfolios.
But actively managing the fixed income portion of a 60/40 portfolio can have its benefits, according to Lavergne.
He pointed to the Janus Henderson Balanced Fund which has benefitted from its overweight to investment grade corporate bonds and securitised fixed income assets.
“In the past two and a half years, if you were looking for value in fixed income, the way to go was securitised,” Lavergne said. “CLOs are a good example: you could buy an asset that was triple A rated floating rate, while the corresponding yield would have been a triple B corporate bond.”
Although securitised fixed income assets such as CLO’s do see periods of spread widening when bonds sell off, historically, they tend to have a relatively muted drawdown and a quicker rebound.
Lavergne – a Frenchman based in Singapore – likened the 60/40 portfolio to a baguette: “The best baguette and the worst baguette are both made with the same ingredients.” he said. “It’s just the quality of the baker, and we think we have the best bakers in the business.”
