Why Are 60/40 Portfolios Underperforming?

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In their latest episode of the VALUE: After Hours Podcast, Travis, Taylor, and Carlisle discuss Why Are 60/40 Portfolios Underperforming?. Here’s an excerpt from the episode:

Tim: Yeah. Sure. We’re about two weeks into earnings. And so, a lot of the financials have reported. I thought it’d be interesting to get a view on credit and the consumer. And so, starting with the good news, the quote from Jamie Dimon, basically paraphrasing him, but almost precisely what he said. He said, “Commercial credit has never been better in our lifetimes.” And so, I think that’s interesting. I think a lot of the companies that I follow closely, they turned out their debt, they took advantage of low interest rates, they have relatively conservative leverage ratios. And so, higher rates aren’t a huge deal for them at this point in time. We had low rates for so long that there really was the opportunity to do that and at pretty good duration, too. I thought that was interesting.

And then another aspect of that is, when you look at the triple-C bonds, the highest of the high yields, the last few years, even last decade, a lot of them are Energy and there still are some in Energy. But if you think about it, those companies are making more money than they have in quite some time. I think that’s another reason why that’s less of an issue this year and that’s hugely positive for the banks, especially the big banks, the Citi groups in the world, the JPMorgan’s. Commercial credit is not going to be a huge deal in this recession in my opinion. When you look at– [crosstalk]

Jake: Tim, can we do a quick detour on that with–?

Tim: Yeah, of course.

Jake: I’m just thinking like the total pie of economic value created and who gets to win and lose in this is going to be somewhat divided by equity and debt. If management executes good cap allocation on the debt front, let’s say, they get long terms cheap debt, it feels like that would be positive accrual for equity holders. But therefore, we have to lighten the scale somewhere else. If you’re the debt holders, does that mean that that was Pozo debt to be selling and underwriting?

Tim: Well, it’s a good point. I saw today, I think Bloomberg had the article or a note, the Journal did. But the amount of negative yielding debt is down 87% from the highs. I think it’s at $2 trillion now. I think it was $20 trillion or something like that going into the year.

Jake: How about real?

Tim: Yeah, exactly. Exactly. If you’re buying a bond, as long as that bond is not defaulting, they’re losing money. That’s why the 60:40 portfolios are doing terribly. I always thought it was crazy when people do Monte Carlo simulations. It’s always like the bonds outperform when the equities are doing bad and you get a positive trend there. It’s like not always. Not when you’re starting at zero interest rates going way higher. So, I think that’s a good point. But I don’t think it would be too severe. I think in my opinion, we’ve probably seen the worst for bond performance.

Jake: Okay.

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