Low Yields Put the 60/40 Asset Allocation on Ice

December 8, 2020

Low Yields Put the 60/40 Asset Allocation on Ice Photo

As the bond bull market has been running for nearly 40 years and U.S. interest rates hover near record-low levels, investors of all varieties are questioning the viability of the traditional 60/40 portfolio. Do the diversification benefits of bonds offer enough value in a zero-interest-rate world? Will Treasury yields join European and Japanese government debt and cross the zero lower bound during the next episode of market and economic stress? What other asset classes offer the potential for higher returns while still protecting on the downside?

The relationship between stock and bond returns has been variable over time or, in statistical terms, has exhibited positive and negative correlation depending on the environment. However, throughout history, U.S. Treasuries have consistently delivered on their reputation as a safe haven asset during periods of market stress — when investors most need diversification.

Treasury bond performance shined again this year as the coronavirus pandemic forced a national shutdown and equity investors suffered through the fastest 30% decline on record. As risk markets melted and investors rushed to safety and liquidity, 10-year Treasury bonds generated a first quarter return of more than 11% — which was even more impressive in light of 10-year yields starting the year below 2%.

While the search for bond alternatives has yielded answers ranging from Bitcoin and gold to hedge funds, I believe balanced strategies represent an area where investors can source attractive income and total return characteristics, versus core fixed income. Balanced strategies that have the flexibility to invest opportunistically across a company’s entire capital structure are well positioned to find attractive value in today’s zero-rate world, where more than half the companies in the S&P 500 Index pay dividend yields in excess of the average corporate bond yield.

PMAM’s balanced income strategy seeks to invest in a combination of dividend-paying equities and high-conviction fixed income ideas, including nontraditional areas like convertible bonds and preferred stock. We primarily focus on “self-funding” companies — which generate strong free cash flow without relying on the capital markets to survive. Our emphasis is on lower downside capture combined with positive alpha from security-specific stock and bond selection to generate attractive risk-adjusted returns.  

I believe core fixed income sectors like Treasuries and highly rated corporates will remain the most effective diversifiers to risk assets in any interest-rate environment. However, looking beyond core fixed income for a portion of the traditional 40% bond allocation should add long-term value for investors.


Important Information

Past performance is not indicative of future results. Investors should be aware of the additional risks associated with investments in non-diversification, undervalued or overlooked companies and investments in specific industries. In addition, investors should be aware of the additional risks associated with investments in non-investment grade (high yield) debt securities and structured securities, which are subject to greater fluctuations in value and risk of loss of income and principal as a result of interest rate risk and economic risk. There is no guarantee that dividend-paying equities will pay or continue to offer its dividends. Diversification neither assures a profit nor eliminates the risk of loss.

The information herein does not constitute investment advice and the strategy described may not be available to, or suitable for, all investors.

Tags: asset allocation | Bonds | Fixed income | Diversification | Yields | Interest Rates | Treasuries

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The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.

This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice.  The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete.  Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements.  Actual results may differ significantly.  Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.

Investing involves risk, including possible loss of principal.  Past performance is no guarantee of future results.  All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.

High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.

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