Rising Yields Are Hurting One of 2017's Top Portfolio Blueprints

(Bloomberg) -- Rising bond yields have taken the wind out of one of 2017’s most successful fund strategies.

So-called balanced portfolios, the quintessential strategy of investing 60 percent in stocks and 40 percent in bonds, have gone from hero to zero this year after debt yields surged and equities slumped. After posting their best performance in decades last year, U.S. funds using such a methodology have dropped 7.3 percent since Jan. 26, while European and Japanese peers lost 5.9 percent and 7.2 percent respectively, according to Goldman Sachs Group Inc.

Investor fears over rising inflation forced a sharp correction in equity markets last week and triggered a spike in volatility, while government bond yields both sides of the Atlantic have climbed to multi-year highs in the face of tightening central bank monetary policy. That is in contrast to last year, where stocks rallied amid an improving economic backdrop and inflation remaining anchored -- known as a “Goldilocks” scenario.

“In 2017 a balanced 60 percent stock/40 percent bond portfolio had one of the strongest risk-adjusted returns since the 1960s as bonds and equities went up together, with very low volatility,” Goldman strategists led by Christian Mueller-Glissmann wrote in a note to clients dated Feb. 15. “But the faster-than-expected increases in inflation and rising uncertainty of inflation have challenged the Goldilocks narrative, resulting in a material pick-up in rates volatility, which has spilled over to equities.”

Still, the U.S. bank argues that fading concerns on inflation and better-than-expected growth could create a more risk-friendly narrative for investors, recommending that they overweight equities and commodities, and underweight government bonds.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Scott Hamilton, Keith Jenkins

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