SMSF advisers should steer away from returning to a simple 60/40 ratio for equity and bond investments and consider looking at alternative assets to generate yield, an Australian investment manager has said.
GSFM market strategist Stephen Miller said recent strong yields had made bonds attractive and they should be included in a portfolio.
“Bond yields are at a level where they’re not going up much further and the move upward has probably run its course,” Miller said during a media briefing in Sydney yesterday.
“Where I am little more uncertain is I’m not sure they’re going to go down quickly either without a big crisis.
“However, if yields are 4.5 per cent and there is a crisis, such as another global financial crisis or tech wreck or something of that order of magnitude, it may be for the first time in the post-pandemic era, in an inflationary period, that bonds can again play the safe harbour role in a portfolio.”
He said for SMSFs some bond exposure may provide yield without the prospect of a capital loss given that from 2021 until 2024, yields have moved from close to zero to 4.5 per cent for a 10-year bond.
“So I’m saying have some bonds in your portfolio because they are slowly getting back that insurance set of attributes they used to have, but I don’t think that is the only answer and we are not back to a 60/40 portfolio mix.”
He added to do so would ignore the lesson of the past few years, which was the assumed negative return correlation between bonds and equities was always stable, when it can shift heavily the other way.
“This assumption does not help in high inflation periods where bond and equity returns become correlated in a way that you lose money from both of them,” he said.
“The lesson for when you are looking at a portfolio, and this is true for an institutional manager as it is for someone who runs an SMSF, is that rather than 60/40 we should be looking at 40/30/30 where the last 30 is sources of return that are uncorrelated to bond and equity market-type returns.”
He said his personal preferences for these sources were towards gold, commodities, long-short fixed income and equity funds, and arbitrage-related strategies.
“It’s important for those that are in the arena of giving investment advice to emphasise that 60/40 portfolios is an oversimplification of how you might want to put together a retirement nest egg,” he said.
