BlackRock ends 60-40 portfolio in bold move

Strategists suggest creating solutions that incorporate alternative strategies

BlackRock ends 60-40 portfolio in bold move

In order to deal with rising interest rates, strategists at BlackRock Inc. are abandoning the 60-40 portfolio in favour of tactical bond holdings, public and private investments, and other investing strategies.

According to a report by Bloomberg News on Tuesday, strategists at BlackRock Investment Institute, the research division of the largest asset management in the world, advise "breaking up traditional asset allocation buckets, moving away from broad allocations to public equities and bonds."

“These old assumptions do not reflect the new regime we’re in—one where major central banks are hiking interest rates into recession to try to bring inflation down,” the strategists said.

Traditional 60% stocks-40% bonds asset allocation strategies, which have historically done well over the last 30 years owing to low inflation, decreasing interest rates, and negative correlations between stocks and bonds, may need to be revisited in order to successfully achieve the desired financial outcomes.

Bonds can be negatively impacted by escalating interest rates and inflation, making them the preferred funding source for alternatives. This provides an additional tool to adjust portfolio duration and look for more diverse performance drivers.

After seeing its largest annual decline in more than a decade, a Bloomberg U.S. 60-40 portfolio index is up 6.3% this year. BlackRock strategists caution that this does not portend a return to the consistent growth saw in the four decades since the early 1980s. They advise focusing on particular equities sectors, such as energy or healthcare, and choosing businesses with strong cash flows and resilient supply networks.

“We believe in a new approach to building portfolios,” where “strategic views need to be more granular—across sectors and within private markets—to help build more resilient portfolios in the new regime,” they said.

The strategists advise investors to reconsider their allocations to fixed-income securities because their returns are more closely correlated with equities performance and no longer serve as a portfolio's stabilizing force. Due to the favourable returns and likelihood that above-target price pressures will persist, they prefer tactical allocations to inflation-linked bonds and short-term debt.

“We see interest rates staying higher as the Federal Reserve seeks to curb sticky inflation—and we don’t see the Fed coming to the rescue by cutting rates or a return to a historically low interest rate environment.”

The need for investors to attain their intended financial objectives still exists, according to Michael Gates, Head of Model Portfolio Solutions for Multi-Asset Strategies & Solutions. He said the success of yesterday's 60-40 portfolio is unlikely to be sustained since the performance precedent drivers are fundamentally different now. But it doesn't mean a balanced portfolio can't still prosper; investors just need to be more inventive with their allocation plans.

BlackRock aims to do this by reinventing the conventional 60-40 portfolio with improved features through the addition of alternatives.