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BlackRock Ditches 60/40 Portfolio in New Regime of High Inflation

Strategists from BlackRock Investment Institute favor public and private investments as well as tactical holdings of bonds.

(Bloomberg) -- BlackRock Inc. strategists are ditching the 60/40 portfolio in favor of public and private investments as well as tactical holdings of bonds to navigate higher interest rates.

Strategists from BlackRock Investment Institute, the research arm of the world’s largest asset manager, recommend “breaking up traditional asset allocation buckets, moving away from broad allocations to public equities and bonds,” according to a Tuesday note.

“These old assumptions do not reflect the new regime we’re in – one where major central banks are hiking interest rates into recession to try to bring inflation down,” the strategists said.

A Bloomberg US 60/40 portfolio index is up 6.3% this year after tumbling almost 17% in 2022 in its biggest annual drop in over a decade. However, BlackRock strategists warn this does not indicate a return to the persistent gains seen in the four decades since the early 1980s for the popular portfolio mix.

The strategists recommend looking at specific equity sectors, such as energy or healthcare, and selecting companies with robust cash flows and resilient supply chains that can endure a recession.

“We believe in a new approach to building portfolios,” where “strategic views need to be more granular – across sectors and within private markets – to help build more resilient portfolios in the new regime,” they said.

Investors should rethink fixed-income allocations given their returns are increasingly tied to equity performance and no longer provide the portfolio ballast they used to, according to the strategists. They favor tactical allocations to inflation-linked bonds and short-term debt due to attractive yields and the prospect that above-target price pressures will endure.

“We see interest rates staying higher as the Federal Reserve seeks to curb sticky inflation – and we don’t see the Fed coming to the rescue by cutting rates or a return to a historically low interest rate environment.”

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