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Why 2022 broke the traditional 60/40 model

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June 2023

Following the fastest, most aggressive rate hikes seen in a generation, Andy Warwick, Newton portfolio manager on the BNY Mellon Global Real Return strategy believes we’re in for a decade of price instability, heightened geopolitical risks and volatility. But investment opportunities remain.


  • 2022 was a difficult year across all asset classes and ultimately “broke” the traditional 60/40 asset allocation equity/bond model
  • Bonds may no longer be the best way to stabilize portfolios – we need to start considering a broader set of alternative investments
  • We are going to see a rise in volatility, so how you manage that is increasingly important 

Last year was what Andy Warwick calls a transition year — and a painful one at that. Warwick says the end of the Cold War, the break-up of Russia, and the advancement of China inflation drove inflation and interest rates lower for decades. This created a great environment for risk assets, he notes. But 2022 changed that. Covid-19 led to unprecedented levels of spending and assistance in the US. It was bound to have an inflationary impact, he notes, commenting that the subsequent environment saw the fastest, most aggressive hike in decades.

This transition led to a difficult year across all asset classes and ultimately “broke” the traditional 60/40 asset allocation equity/bond model, Warwick purports. “This is why we can no longer rely on equities and bonds – correlations have shifted. Bonds may no longer be the best way to stabilize portfolios. While we are unlikely to ever get to near 15% interest rate levels of past generations, from here we are also unlikely to ever return to zero again. This is why we need to start considering a broader set of alternative investments.”

Warwick highlights the attractiveness of a few such alternatives, such as carbon. In 2005 carbon emissions trading schemes were initiated, allowing companies to sell on unused credits which bigger polluters can buy. Europe has become the largest carbon trading market in the world, he notes. Today, with the increased global focus on emissions and lowering targets, each year the “supply” of unused credits is becoming constricted, he adds.

Another area of alternatives ties into ongoing electrification, driving greater demand for commodities. Warwick says such is the demand rising in commodities we may eventually see governments start to hoard supply, anticipating future shortages – like in copper. Other aspects of the energy transition, like wind farms and solar panels, have other attractive qualities, he says, such as somewhat predictable cash flows thanks to implicit and explicit government support.

The last area Warwick cited as an example of attractive alternatives offering diversifying effects was volatility itself. “We need to think of volatility as an asset class and some of the instruments in this area can act similar to an equity replacement featuring equity-like returns with half the volatility.”

Reflecting this view, allocations within the BNY Mellon Global Real Return strategy have increasingly favored alternatives in recent years. As of the end of April, just under 20% of the strategy was invested in alternatives such as infrastructure, royalties, energy storage, commodities and risk premia. 

As of mid-May, the team favored consumer companies with pricing power as well as domestic producers (companies that don’t have to worry about foreign exchange issues, Warwick notes), commodities and healthcare. The latter, Warwick says, has been an unloved area thanks to worries over patent expires. However, post-Covid, the healthcare industry is trying to catch up on procedures that were delayed while innovation in drugs has become an exciting area that could save governments billions in healthcare provision, particularly drugs tackling areas like Alzheimer’s and obesity.

Regarding the strategy’s international exposure, Warwick notes while some Hong/Kong China exposure is via single securities, the team have preferred to play the reopening story in what they saw as the most liquid and efficient way, via index futures. “Liquidity is key for us in this market as we want to be able to exit our positions quickly should it be necessary.”

While Warwick explains the team’s view on attractive diversification and returns from alternatives, he notes Global Real Return still has a reasonable amount in return-seeking assets. “We’re cautious but we’re not hunkered down in a cave. The use of alternatives is about being more dynamic. If we’re to learn from times, like the high inflation, raising rate environment like the 1970s, then we also need to remember that the 70s saw aggressive equity rallies. We have to be adaptable.”

“We are going to see a rise in volatility, no question,” he says. “So how you manage that is increasingly important. Volatility does create opportunities and dispersion of performance between different stocks, sectors and asset classes, which favors active stock picking. However, there will be also times, when such calls may be too early.” Warwick notes that much like most investment funds, 2022 was a challenging year, with the team perhaps too slow to de-risk. The start of 2023 also posed some difficulties with the strategy overweight energy and long on AT1 bank bonds ahead of the March banking crisis, dragging on performance. 

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