The lure of the balanced portfolio has been its ability to limit losses in challenging stock markets through bonds’ negative correlation. But in 2022, both stocks and bonds lost considerable ground, according to a new Morningstar report.
This led some pundits to suggest the 60% equities/40% bonds portfolio is past its due date. The stock/bond correlation changes through time, however.
And, besides correlations, valuations matter: At the start of 2024, the bond market has been repriced and is now offering some of the highest yields in a long time.
Multi-asset funds have struggled against benchmarks. The average moderate global allocation Morningstar Category fund trailed the Morningstar Euro Moderate Global Target Allocation Index by a gaping 2.19 percentage points annualized over the past 10 years through the end of December 2023.
The team discussed the effect of fees in its August 2023 study, titled 'What Does It Cost to Invest in a Diversified Fund Portfolio. The rest of the underperformance was caused by factors such as transaction costs, strategy asset-allocation differences, security selection, and market-timing, which will be discussed here.
Thomas De fauw, senior manager research analyst, Morningstar and author of the report, commented: “Strategic asset allocation is the main driver of a portfolio’s return and explains a great deal of the excess performance versus the benchmark. Looking at the European multi-asset universe we see a broad range of allocations in each of our categories.”
“But benchmarking a multi-asset strategy differs substantively from a strategy focused on a single asset class as the many dimensions of multi-asset strategies complicate the analysis. Moreover, for objectives-oriented funds, such as multi-asset income or environmental, social, and governance-focused funds, there’s a specific investment outcome to consider.
"All the work that goes into achieving those goals is not always captured through benchmark-relative performance, nor is it always clear which benchmark to choose.”
