In the wake of the financial crisis, the “unparalleled monetary policy experiment” undertaken by governments has distorted markets and changed what would be required to build a portfolio that both ensures returns but protects against market fluctuations, Psigma investment analyst Michael Floyd said.
In a blog, Floyd said a 60/40 split has delivered for the past 50 years, but the distortions in the current market and low bond yields mean what’s needed in a balanced portfolio has changed.
He said: “The great financial crisis and the subsequent actions taken by policymakers around the globe have shaken up the theory somewhat. When the FTSE All Share peaked in March 2007, the yield on a ten-year gilt was 5.48%.
“Today, after an unparalleled monetary policy experiment, you get a meagre yield of just 1.16%. Even in a world where negative bond yields have become commonplace, if equity markets were to fall 45% like they did during the global financial crisis, the yield on a 10-year gilt would need to drop to around -1.5% to offer the same protection as it did a decade ago.”
A simple 60/40 split is “no longer enough”, Floyd added, but some so-called balanced portfolios still stick to it as a matter of course.
“When surveying the wealth management industry, firms proudly show off their flagship ‘Balanced’ strategy, but it doesn’t take too much scratching of the surface to realise that the simple use of an adjective leaves significant room for interpretation.
“Our balanced portfolio currently has 44.5% in equities, some of our peers have over 68.0%. Quite a divergence,” he said.
Floyd warned that ‘balanced’ has been misused by portfolio managers, and that investors should examine the construction of the portfolio and question its exposure.
He said: “My point is that understanding exactly how your portfolio is positioned is crucial, and just accepting ‘Balanced’ at face value is a fool’s game.
“A prudent investor needs to dig past these monikers and see what’s under the bonnet.”
