Bonds should play more prominent role in 60/40 portfolios

Oksana Patron

6 October 2023

Now is the time for investors to rethink the place of bonds in 60/40 portfolios and to become more creative around the types of bonds they are buying given an expected downturn in the global economy, according to GSFM fund manager partner, Payden & Rygel.

The change to the investment decisions is being driven by the current macroeconomic environment that opens up favourable opportunities to invest in higher quality bonds which are providing good yields.

Payden & Rygel, portfolio manager, Eric Souders, said that under these circumstances it was important for investors to look to active management as they needed to have more latitude around stock selection.

“The bottom line is that bonds should play a more prominent role in portfolios today,” he said.

“When constructing a portfolio and deciding where to put capital, higher interest rates means including cash is more a comfortable decision for investors. The same is true for those looking to invest in government bonds and high-quality investment grade corporate bonds.

“Bonds offer good running yield potential, of a much higher quality, plus potential price upside.”

According to Souders, credit spreads are still tight, but investors are now well compensated to hold higher quality securities.

“Today you are getting paid to own higher quality securities. You don’t have to reach for yield. In fact the ‘reach for yield’ is almost the reverse of what it was years ago,” he added.

“Similarly, you don’t have to reach down the credit quality spectrum, or head further out on the yield curve, for returns. This means investors can be more conservative and defensive at the front end.”