September 29, 2022
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Investors have little room to hide this year, it seems. Stocks are volatile and bonds haven’t done better for much of the year. Investment-grade US bonds have fallen in 2022. The iShares Core US Aggregate Bond ETF – which tracks the Bloomberg US Aggregate Bond Index – has fallen nearly 8% since the start of this year, although markets bond markets seem to have calmed down a bit recently. Historically, when stocks lost ground, bonds gained. This negative correlation has turned positive during the pandemic, largely thanks to central banks cutting rates to stimulate the economy. But analysts have recently been bullish on income investing as yields start to climb again, with Goldman Sachs saying in an August report that the strategy is poised for a comeback. Here are some ways the pros suggest investors position their portfolios for diversification and protection against market volatility as well as seek higher returns as inflation continues to rise. The 60/40 portfolio The poor performance of stocks and bonds, combined with high inflation, has led some analysts to declare the death of the traditional 60/40 portfolio, composed of 60% stocks and 40% bonds. Inflation has generally been bad news for bonds. But some banking strategists have recently said this strategy will still work. Morgan Stanley said this portfolio can still earn more than 6% a year – and the diversification continues to offer investors some protection against choppy stocks. Wells Fargo, in an Aug. 2 memo, said that strategy is still “alive and alive.” Based on historical averages, the bank said negative performance should be followed by positive double-digit returns over the next three years. “In the rebound phase after calendar years of negative 60/40 returns, equities outperformed bonds by a significant margin, averaging 18.2% vs. 4.5% respectively,” the analysts wrote. Wells Fargo. “Finally, after the 2008 downturn, the 60/40 portfolio through the end of 2021 has posted positive returns in 12 of the past 13 years, with double-digit returns for eight of them. .” The average return of the Bloomberg US Aggregate Bond Index has also risen from around 1.5% to 3.5% since mid-2021 – the fastest one-year jump since 1994, Wells Fargo said. Consider high-quality, investment-grade bonds In June, global credit suffered its biggest pullback since the pandemic, and the first half of the year was the worst on record for excess return and total return, according to Wells Fargo Securities. But if investors are selective enough, they can still find pockets of relative safety in certain bonds, analysts say. High-quality, long-duration bonds would be the best investment idea, Sarang Kulkarni, portfolio manager at Vanguard, told CNBC’s “Squawk Box Europe” in late July. “From a valuation standpoint, they’ve corrected a lot… It’s not just Treasuries, it’s not just government bonds,” he said, adding that Treasury bonds high quality have a “defensive characteristic” against inflation. Here are a few bond funds that Morningstar said in a report released in late July managed to beat their peers because they are less interest rate sensitive. Bond prices have an inverse relationship with interest rates. Vanguard Short-Term Inflation-Protected Securities Index fund domiciled in the United States Invesco Corporate Bond (UK) M & G Corporate Bond Fund M & G Strategic Corporate Bond Consider thematic funds Investors could consider allocating between 10% and 20% of their portfolios to thematic funds, which play on secular growth themes and therefore “have tremendous ability to enhance portfolio results,” according to Morningstar. The company says these funds have recently grown in popularity and focus on themes related to technological innovation, consumer habits, among other areas. An equally-weighted thematic index “consistently generates better returns,” with a compound annual growth rate of 7.48% versus 6.28% for the Morningstar Global Markets Index. “We believe that thematic investing offers an attractive alternative for investors who do not wish to be limited to regional and sector funds. We believe that, if done correctly, exposure to thematic investing can position investors for the blue chips of the future,” Morningstar said in a recent report Investing in infrastructure While consumer price inflation shows no signs of slowing down, infrastructure is a good investment due its “ability to act as an inflation hedge in investment portfolios,” asset manager Franklin Templeton said in a July report. “Infrastructure is generally able to adjust to inflationary environments by because of the largely pre-programmed way in which it builds inflation into regulations and contracts,” he said. The company also underlined It is recognized that infrastructure revenues are underpinned by long-term contracts, which ensure a steady stream of revenue over a long period.
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