Vontobel Multi Asset Boutique

60/40 portfolios back in fashion despite an “annus horribilis”


Anton Oberhofer

Head Global Balanced Solutions, Senior Portfolio Manager

Meet Anton

| Read | 5 min

Key takeaways

  • The Queen may have remembered 1992 as her “annus horribilis,” but for financial markets and particularly multi-asset investors, it’s 2022 that deserves this sorry distinction.
  • Seeing the value of their multi-asset portfolios melt like ice in this year’s European summer heat, some investors may start questioning the validity of the 60%/40% portfolio altogether.
  • The trouble in the multi-asset world was mainly caused by a decade-long policy by central banks to splash their cash.
  • However, with Jerome Powell and his colleagues moving the federal funds rate ever higher, 60/40 may yet be back in fashion.

Queen Elizabeth II used the term “annus horribilis” in 1992 when describing troubling events like the fire at Windsor Castle. Whether that was really the worst year in the monarch’s reign is debatable. Sometimes calamities just keep coming, as many investors know.

Financial markets were thrown off balance in several anni horribiles, braving a succession of crises like the collapse of Lehman Brothers and the effect of the pandemic. Yet this year saw a singular culmination of disasters with Vladimir Putin’s war in Ukraine compounding the effect of the inflation beast rearing its ugly head. This led to a simultaneous slump in equities and fixed income as well as narrower segments, such as real-estate securities during the first six months of 2022 (see chart 1). The exception was commodities because of the price-driving effect of energy security concerns that arose last year, recently exacerbated by Moscow’s cuts in gas supplies to the West. But the upward trend in commodities contributed to the rise in consumer prices that was a core reason for the markets’ woes. Bonds in particular, a traditional cushion against hard times in multi-asset portfolios, failed to live up to their reputation.


The concurrent downturn of previously uncorrelated asset classes has left many multi-asset investors scratching their heads. One of the answers has been hiding in plain sight: the global central banks’ commitment to move key rates ever lower to stave off economic hardship. This policy, as unorthodox as controversial, has been in place since the global financial crisis in 2007, and was even expanded when measures to contain the spread of the Covid-19 virus froze economic activity around the globe.

Whilst the zero-interest cure got the patient out of intensive care, evident in the economy’s surprisingly fast recovery from factory shut-downs and supply chain disruptions, its side effects were severe as well. The central banks’ lifeline to the economy and financial markets was an important move, but the liquidity flood that came with it also helped to fan inflation, a long-forgotten problem initially belittled even by the world’s most powerful monetary authority, the US Federal Reserve. Add to that skyrocketing energy prices, valuations of stocks and bonds blown out of proportion by a flood of central bank-generated liquidity, and policymakers’ realization that they may have shrugged off the issue for too long. All things considered, this is a recipe for a broad downturn on Wall Street, London, Frankfurt, or Zurich.

60/40 shaken but not forsaken

Seeing the value of their multi-asset portfolios melt like ice in this year’s European summer heat, some investors may start questioning the validity of the 60%/40% portfolio altogether. Is the classic split of 60% equities and 40% bonds (or variations thereof depending on risk appetite) a thing of the past? We don’t think so.

First, let’s take a look where central banks are headed. After a rude awakening from an inflation-belittling sleep, officials like US Fed Chairman Jerome Powell have sprung into action. Their previous overly generous stance has changed to one some observers describe as exceedingly restrictive. With key rates bound to rise, valuations of stocks and bonds are likely to start coming down from unrealistic levels, eventually leading to heightened buying interest.

Second, investors’ risk capacity will adjust. During the long period of so-called quantitative easing, a term from the central bank’s guide to opaque language signifying massive asset purchases for the purpose of liquidity injections, bond market participants were forced to pick up riskier paper whose higher coupons outweighed concern about the issuer’s solidity. Now the rising tide of higher interest rates is weighing on financial markets with parts of the sovereign segment regaining its attractiveness while offering the usual protection.

It’s worth noting that inflation is bad enough but, if contained, still preferable to deflation. When prices rise moderately and gradually, companies can adapt and continue to invest. What’s more, we believe that inflation will start coming down over the next few months, with the possible exception of energy inflation. Deflation, on the other hand – a potentially decade-long period of falling prices where everybody hoards cash – can be far harder to manage, as Japan’s decade-long struggle with deflation has shown, for instance.

Shares and real estate can benefit in inflationary times

How should investors proceed? We believe they should acknowledge the new inflationary environment and adjust their financial planning. According to Vontobel research from January 2022, asset classes with underlying income streams, such as equities and real estate have a leg up in an environment of rising prices. Companies are mostly able to pass any increase in input costs onto their customers, and even more so if they boast a commanding market share. Shares of such companies, ideally picked by active managers for a portfolio, should consequently benefit. The same holds true for property companies, whose rental income is linked to inflation, protecting them in times of rocketing consumer and production prices.

Equities and property, so-called real assets with value drivers like products a company sells or floor space a developer rents out, contrast so-called nominal assets, such as fixed-income securities. Government or corporate bonds lack the income-generating mechanisms of stocks or real estate. With the exception of so-called inflation-indexed paper, coupons are fixed for the whole maturity of the security. Commodities can diversify a multi-asset portfolio but are marginal in the big scheme of things. Moreover, they are input factors in corporate manufacturing processes, which somewhat reduces their value as a stand-alone asset class. Like commodities, precious metals, such as gold make sense as a stabilizing element in a multi-asset context (see chart 2).


It follows that investors seeking to preserve the value of their portfolio should hold a significant share of stocks and real-estate funds. Whilst these are prone to price fluctuations because, in contrast to bonds, their future income streams cannot be adequately predicted, they are long-term value drivers. The percentage of such assets in a portfolio also primarily depends on the risk capacity of the investor. Generally, the longer the investing horizon, the greater the prospects of long-term value preservation and higher resilience to inflationary pressure.

Central bankers’ rethink could prove a game changer

According to a pretty reasonable rule of thumb, investors should move funds they don’t immediately need into real assets. These may be buffeted by short-term turbulence but usually excel over the longer term. By contrast, investors that depend on a fixed amount of money at the end of a given year – a basic requirement of pension funds and many private investors – should go for nominal assets, such as bonds. This directs our gaze towards the good old balanced portfolio that may have fallen out of fashion somewhat during the times of the extremely loose monetary policies.

While 2022 is “not a year on which we shall look back with undiluted pleasure”, to use a wonderfully euphemistic line from the Queen’s 1992 speech, 60/40 may yet get the respect it deserves as the US Federal Reserve has changed tack and is now cruising towards “normalized” waters (i.e., higher federal funds rates). Had Elizabeth II been able to put on an investors’ hat before attending the Royal Ascot, she might have added: “Keep calm and carry on, and do remain confident that bedraggled portfolios will eventually come to life like the parched lawn adjacent to Windsor Castle.”





Anton Oberhofer

Head Global Balanced Solutions, Senior Portfolio Manager

Meet Anton