From a portfolio construction standpoint, we may be living in truly unprecedented times.
The classic 60/40 investment portfolio that guided asset managers for decades broke down in 2022 as stocks and bonds declined in unison. Was this a historical anomaly or the start of a new trend that has redefined our traditional notion of “safety”?
A Truly Unprecedented Time For Investors
Rising interest rates and generational inflation made 2022 one of the worst years in investing history. The market rout in stocks and fixed income left investors with nowhere to hide as bonds suffered their worst returns 1 in 250 years, and the S&P 500 Index posted its worst calendar year decline since the 2008 financial crisis. Data from Morgan Stanley showed 2 that 2022 was the first year since the 1870s that U.S. stocks and long-term bonds both declined by more than 10%.
The failure of traditional portfolio construction methods led many analysts, including those at Goldman Sachs Asset Management, to question whether the highly revered “60/40 portfolio” might be dead. This simple investment thesis geared toward moderate-risk investors calls for a 60% allocation to stocks to provide capital appreciation and 40% to bonds for income and risk mitigation.
Following the stunning breakdown of 60/40 methods in 2022, Goldman analysts advised investors to recalibrate expectations, incorporate higher-income producing strategies and diversify beyond large-cap equities.
Be sure to check our U.S. Treasury Bonds page to explore more bond funds.
Rethinking 60/40 in 2023
After declining in unison throughout 2022, stocks and bonds have posted a joint rally so far in 2023. While some see this as a reason to return to traditional investment approaches like 60/40, analysts at Blackrock have cautioned that this simplistic approach no longer works in today’s climate.
“A regime of higher volatility with sticky inflation needs a new approach to building tactical and strategic portfolios,” Blackrock analysts Jean Boivin, Wei Li, Paul Henderson and Devan Nathwani wrote 3. “We see the appeal of income, get more granular with views and are more nimble.”
Although 60/40 portfolios have rebounded strongly from 2022, a joint stock-bond bull market like the one we saw during the Great Moderation — the period between the mid-1980s and 2007 — is unlikely because trends in economic activity and inflation have changed. One of the biggest changes stems from central banks, which are hiking interest rates into recession to bring inflation back down. (The pace of inflation in the United States has declined from the peak in June 2022 but remains well above the Federal Reserve’s target of around 2%.)
“The debate should be more about the approach to portfolio construction rather than the broad allocation levels. We believe in a new approach to building portfolios,” the Blackrock analysts wrote.
On the income side, Blackrock sees greater potential in short-term bonds the longer the rates stay higher — the analysts don’t expect the Federal Reserve to come to the economy’s rescue by cutting interest rates anytime soon. This makes short-term paper especially appealing, as tighter credit and financial conditions limit demand for credit.
Long-term yields are also expected to rise as investors demand more premium to compensate for higher inflation and record debt levels. However, unlike the old playbook, the negative correlation between stocks and bonds means long-term government bonds don’t have the same protection against recession.
The analysts recommend moving away from broad allocations to public stocks and bonds toward a more granular allocation across sectors and private markets. On the equities side, companies in energy and healthcare with strong earnings and cash flow are strong buffers in the face of recession.
Based on the different strategies discussed above, here are the lists of mutual funds and ETFs, sorted by their YTD performance.
Short-Term Bonds
| Name | Ticker | Type | Actively Managed? | AUM | YTD Ret (%) | Expense |
|---|---|---|---|---|---|---|
| Vanguard Short-Term Inflation-Protected Security Index | VTIPX | Mutual Fund | No | $61.7bn | 2.6% | 0.14% |
| Vanguard Short-Term Bond ETF | BSV | ETF | No | $70.5 bn | 2.4% | 0.04% |
| Fidelity Short-Term Treasury Bond Index | FUMBX | Mutual Fund | No | $3.47bn | 2.2% | 0.03% |
| iShares Ultra Short-Term Bond ETF | ICSH | ETF | Yes | $6.36 bn | 1.8% | 0.08% |
| Vanguard Short-Term Investment-Grade Inv | VFSTX | Mutual Funds | No | $69.9 bn | 1.7% | 0.20% |
Don’t forget to check U.S. Short-Term Treasury Page to explore more options.
Healthcare Funds
| Name | Ticker | Type | Actively Managed? | AUM | YTD Ret (%) | Expense |
|---|---|---|---|---|---|---|
| ARK Genomic Revolution ETF | ARKQ | ETF | Yes | $2.1 bn | 23% | 0.75% |
| Fidelity Select Health Care | FSPHX | Mutual Fund | No | $8.07 bn | 3.2% | 0.68% |
| Fidelity Advisor Health Care I | FHCIX | Mutual Fund | No | $5.54 bn | 3.1% | 0.72% |
| SPDR® S&P Biotech ETF | XBI | ETF | No | $6.44 bn | 1.7% | 0.35% |
| Vanguard Health Care Inv | VGHCX | Mutual Fund | No | $46.2bn | 0.3% | 0.30% |
| iShares Biotechnology ETF | IBB | ETF | No | $7.64 bn | -2.5% | 0.45% |
Energy Funds
| Name | Ticker | Type | Actively Managed? | AUM | YTD Ret (%) | Expense |
|---|---|---|---|---|---|---|
| InfraCap MLP ETF | AMZA | ETF | Yes | $0.31 bn | 11.8% | 1.4% |
| Alerian MLP ETF | AMLP | ETF | No | $6.32 bn | 7.8% | 0.87% |
| Global X MLP ETF | MLPA | ETF | No | $1.35 bn | 7.7% | 0.45% |
| Oppenheimer SteelPath MLP Income A | MLPDX | Mutual Fund | Yes | $2.96 bn | 2.6% | 1.39% |
| Goldman Sachs MLP Energy Infrastructure Inv | GLPIX | Mutual Fund | No | $1.47bn | 1.6% | 1.21% |
| Fidelity MSCI Energy ETF | FENY | ETF | No | $1.46 bn | -1.9% | 0.08% |
You can also check our Energy Sector Equity funds page and Healthcare Sector Equity funds page to browse through other options.
The Bottom Line
Short-term bonds funds have performed well in 2023, with BSV, FUMBX and VTIPX posting positive year-to-date returns. Short-term bonds are expected to remain an attractive play as central banks keep interest rates elevated.
On the equities side, healthcare-focused mutual funds have also performed well. Energy has lagged, likely in response to volatile oil and gas prices, but the sector could experience tailwinds as oil prices rise and global energy demand continues to improve.
1 CNBC (Jan 7, 2023) How to Position Your Portfolio for 2023
2 Morgan Stanley (Jan 10, 2023) Why Valuation May Be Key to Defensive Investing in 2023
3 BlackRock (Apr 17, 2023) Weekly Commentary
