Take a look at any chart chronicling bond yields over the decades and you’ll see mountain after mountain — valleys and peaks, including one big spike in 1981 when rates popped to historic levels. The question for investors today, however, is where are we on the chart today?
“I think, truth be told, we’re not talking about the peak —it’s not the mountain,” explains Thomas Dobler, vice-president, product strategist, multi-asset class strategies, Acadian Asset Management. “It’s actually the valley.” For investors, that valley is a treacherous place to be.
As Dobler notes, in the past, a balanced 60/40 portfolio would have held its own as rates rose and fell — but in today’s post-financial crisis world, this is no longer the case. Now “there’s no place to hide,” he says. And even standbys like commodities aren’t able to add diversification like they did in the past.
“Then there is another thing that doesn’t often get talked about from a portfolio perspective — the correlations between equities and fixed income, which have actually shifted,” he explains.
Since the 1990s, asset allocation studies have been built on the assumption that equities and fixed income aren’t correlated. You knew reliably if you had some sort of balanced portfolio; each time the equity market suffered at least your bond portfolio would give you something.”
But with concerns growing over growth and inflation, that relationship has gone from what Dobler calls a “win-win” situation to a “lose-lose.”
The trouble is we know something is coming, he says. But we don’t know exactly what it is — how it will come, when it will come and where.” And while there have been many predictions, it’s really challenging to know what to do and how to position an investment portfolio for the next 10 to 20 years.
So how are we to handle the move up and out of the valley? Maybe there are several directions to move in at once. “Rather than looking ahead and making a one-dimensional forecast along the timeline, the key is to analyze the relationship between bond markets and other asset markets, looking at multiple cycles across countries and markets.”
This is the essence of a multi-asset portfolio. We don’t know what the future is, and when it comes to where rates are, it cannot get any better.” In that case, it’s best to understand and manage short- and long-term risks through a portfolio that works across multiple dimensions.