AMP Capital NZ has added its voice to the mounting chorus of concerns about the resilience of traditional balanced funds amid changing financial fundamentals.
In an investor note published last week, Michael Gray, AMP Capital NZ head of investments, says the old-school 60/40 portfolio mix of equities and fixed income has worked well over long time periods but at a much higher-than-expected volatility.
The AMP Capital paper says long-term studies have shown balanced fund investors would’ve seen four “lost decades” based on the performance of back-tested 60/40 portfolios dating back to 1900.
“Arguably, if you had managed to stay invested in a balanced fund since the early 1990s, the investment experience has not been too bad – albeit this experience has come with a high level of volatility…,” Gray says.
Over the last 30-odd years balanced fund investors have seen serious drawdowns covering the tech crash in 2001, the 2008/9 global financial crisis and the 2020 COVID collapse.
“These drawdowns usually coincide with recessions…,” he says. “The notable exception being 1987. There have also been regular annual drawdowns of between 5-10%.”
And in the 110 years to 2010, a typical 60/40 fund investor would’ve seen negative real returns over rolling 10-year periods close to a quarter of the time, the note says, with the deepest single year loss sinking to -31 per cent.
During the same period balanced funds had after-inflation negative returns every one-in-three years and annual performance of -10 per cent or more every one-year out of six.
Gray says AMP Capital is not out “to predict the next lost decade of the balanced fund but to highlight this type of fund is riskier than many people think and can experience long periods of underperformance”.
In addition to historical data suggesting the 60/40 prescription has not always worked as intended, the paper reiterates current concerns about the ability of bonds to cushion against expected higher equity volatility in an era of rising interest rates.
The paper says balanced fund investors should consider alternative options such as multi-asset strategies – that follow a much more diversified asset allocation – or ‘goals-based’ investing, which matches portfolio construction to individual risk-and-return preferences.