The world’s largest asset manager has abandoned the traditional 60/40 portfolio, which involves allocating 60 per cent of a portfolio to stocks and 40 per cent to bonds, in favour of a novel approach to constructing “tactical and strategic” portfolios.
In its latest weekly commentary, BlackRock’s strategists disagreed with asset managers propagating a return to a traditional portfolio approach, noting that “those used to work when both assets trended up and bonds offset equity slides”.
“We think a focus on any one asset allocation mix misses the point: A regime of higher volatility with sticky inflation needs a new approach to building tactical and strategic portfolios. We see the appeal of income, get more granular with views and are more nimble,” BlackRock’s strategists said.
While admitting that the traditional 60/40 portfolio is performing well in 2023 after “the worst year in decades”, the experts said they believe old assumptions no longer apply. Instead, they assessed that the new economic regime, where central banks are raising interest rates to combat inflation, invites a reconsideration of long-term strategic allocations.
“We don’t see the return of a joint stock-bond bull market like we saw in the Great Moderation. That was a decades-long period of largely stable activity and inflation when most assets rallied and bonds provided diversification when stocks slumped,” the strategists said.
“We believe in a new approach to building portfolios.”
The strategists added that they prefer “to get more granular” with portfolio management, focusing on specific sectors such as energy and healthcare, and actively selecting companies with strong fundamentals like robust earnings, cash flow, and supply chains. They also prioritise firms with strong market share and the ability to pass on higher prices, which can better withstand a recession.
Furthermore, they are overweight inflation-linked bonds and short-term debt, reflecting their outlook for persistent inflation.
“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 strategists said.
Lastly, they said being “more nimble” is key in response to market shocks and structural forces such as geopolitical tensions, the energy transition, and banking sector turmoil.
“We’re adjusting our strategic portfolios more frequently in response to new information and market shocks,” the strategists agreed.
“We think that getting the asset mix right in the new regime will be crucial for maximising returns: Our work finds that getting it wrong could be up to three times greater the impact now than in the Great Moderation. Bottom line: Our portfolio construction approach favours income while getting granular and more nimble in the new regime,” they concluded.
