Why it's too early to declare the 60/40 portfolio dead

He noted that the return on a fixed income portfolio is comprised of two components: price and accrued interest. Once high interest rates impact the price component, longer-term portfolios will benefit from the higher rates. So, those with a 15-year retirement horizon can reprice part of their portfolio every three years and benefit from the higher interest coupons.

“They’d have five surge opportunities over the next 15 years. So, in a rising interest-rate environment, they can ride the yield curve and benefit from such high interest rates as they go forward,” said Hasanjee.

He said some investors also think bonds have lost their yield utility in portfolios, “but we think investors should be overweight on bonds, given the current conditions. “We believe that the higher interest rates are going to generate the benefit of higher coupons, which will be beneficial to the investors as long as their investment horizon is longer.”

Hasanjee noted that their global credit fund was generating a 6% yield, so locking in yields at that level would be key for good investment.

“If you’re investing in bonds, or overweighting bonds, with such high yield to maturity, you’re reducing your equity risk in the portfolio and compensating for it with more bond risk,” he said. “Basically, by doing that, you’re bringing the portfolio volatility down. And, when rates go down, in future, your portfolio will benefit from higher bond prices.”