How has coronavirus impacted return expectations?

08 December 2020

4 minute read

The winners from the last three decades are almost certainly going to be different from the winners of the future but what does this mean for investors?

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • What is a 60/40 portfolio?
  • How has a 60/40 portfolio performed in the past?
  • What are some of the alternative investment options available?

A simple 60% allocation to shares and 40% to bonds has been the building blocks of many portfolios over previous years. Whilst there are different interpretations of this strategy, it is often focused on global shares and government bonds, with the concept largely based on each exhibiting different return characteristics. Put simply, when share prices are falling, all things constant, you tend to see bond prices rising.

If investors are concerned about economic health and growth prospects and, as a result, are more pessimistic about company earnings, they may sell shares and buy developed government bonds, which are much less risky and are often considered to be a ‘safe haven’ investment. After all, whilst anything is possible, it is extremely unlikely the US or UK government will default on its debt. Therefore, this mix of investments offers the opportunity to participate in expected growth of company earnings over the long term, by holding shares, whilst simultaneously holding an allocation to government bonds, to provide resilience during more turbulent markets.

The success behind 60/40

In the early 1980s, the ‘Volcker shock’ saw the then Chair of the US Federal Reserve (Fed), Paul Volcker, raise interest rates to a peak of 20% in 1981, in an attempt to combat high inflation (rising prices). Ever since, interest rates across the world have generally been falling and the huge response from governments and central banks to combat the pandemic this year has seen already low rates fall sharply to a point where, in the UK, they are now at just 0.1%; and this is a similar story in the US. 

As mentioned previously, government bond prices generally increase during a turbulent market, while shares prices have generally risen over time too. Note that past performance is not a reliable indicator of future performance.

Is 60/40 really dead?

Bonds have had a very strong run over the past three decades, partly supported by interest rates falling from a high base. With interest rates at record lows, bonds, and particularly those issued by governments, are very unlikely to see the strong returns (yield) previously witnessed over the coming years. There are also reasonable arguments they might be a less effective hedge against downward moves in share prices at current levels.

So, where else to shop?

When traditional 60/40 portfolios rose to fame in the 1980s, there were few alternative asset classes the average investor could explore. For instance, Emerging Market Debt, which is debt issued by the governments or companies of emerging market economies such as China and Brazil, has only recently become an investable asset class. In addition, emerging markets used to be much less accessible and more expensive than they are now and, as China is becoming an increasingly larger influence in the global economy, opportunities may continue to appear in the region. This asset class is typically riskier, but returns over the long term can be attractive.

One other asset class we invest in is Alternative Trading Strategies, which feature funds that utilise strategies different to typical equity funds. For example, funds within this asset class may look to trade at specific points around a merger or acquisition, buying shares of either the acquirer or acquiree depending on many variables surrounding the deal; this is called ‘merger arbitrage’. Another strategy we see used by funds in this asset class is a long/short approach – buying shares with the hope that they appreciate in price over time, whilst also entering into agreements whereby the fund can make money if the value of shares fall. We feel this can offer some portfolio resilience, whilst also positively contributing to portfolio returns. Admittedly, some of these strategies have struggled in more recent years but, as ever, we caution looking solely in the rear-view mirror. The future winners can be very different to the past. 

Are the winners of yesterday the place to be?

As we’ve commented on throughout this year, the returns of the ‘tech titans’ have been impressive, no doubt. However, past performance is not a reliable indicator of future performance.

The difference in sector returns has been vast, particularly over the past 12 months, but as our regular readers will know, we like to take a balanced approach, investing across a range of sectors and geographies, as opposed to having all our bets on the winners of yesterday. Whilst incredibly short term, the market moves after the promising vaccine news recently are perhaps a reminder why you should not solely invest in prior winners – many of the struggling sectors and companies rebounded strongly.

As you’d expect, we’ve been in regular dialogue with the managers of the funds we include on our Barclays Funds List. Many have been commenting on the opportunity the difference in share returns has created for highly skilled share pickers and indeed, many of our managers bought strong companies, in their view, in the sell-off earlier in the year and have seen shares prices rebound strongly.

Investment Conclusion

Is the 60/40 portfolio dead? Maybe, in the traditional sense. Have investors been spoiled by the past decade? Almost certainly. We have seen a phenomenal run from both shares and bonds. The winners from the last three decades are almost certainly going to be different from the winners moving forward, particularly given the change we are seeing in society at present.

Where to invest?

We believe that the best way to achieve your long-term investment goals is to have a diversified portfolio. To help you we’ve created our Funds List – it’s made up of funds we like from the sectors we believe are key to building a diversified portfolio. Within each sector, there’s a mix of investment focus and investment approaches to choose from. So why not take a look at our selection?

Two funds which we like are the Aviva Investors Multi Strategy Target Return Fund and the Invesco Global Targeted Returns Fund. Despite sitting within the alternatives asset class, which is generally associated with higher fees, both funds are run at a relatively low cost and act as good diversifying investments in a traditional share and bond portfolio.

To diversify your investment, you may like to consider our own Barclays Ready-made Investments (RMI). The RMI are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest in passive funds across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

Whichever option you choose, you must accept that all investments can still fall in value as well as rise and you might get back less than you invest.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

Find out more about our Ready-made Investments.

Plan & Invest is a new service which creates and manages a personalised Investment Plan just for you. Whether your long-term goal is your child’s university education, retirement or just building a nest egg, all you have to do is tell us a bit about yourself and then, if your application is successful and you’re ready to invest, let our experts select and manage your investments (minimum investment is £5000).

Read the Assessment of Value report for funds run by Barclays. [PDF, 683KB]

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