Is a 60/40 benchmark fit for purpose in a high inflation environment?

It seems unlikely that a 60/40 benchmark will continue to meet the same “inflation plus” performance targets as the past. Schroders looks at the reasons why and what institutional investors can do about it.

Lesley-Ann Morgan – Head of Multi-Asset Strategy at Schroders
Ben Popatlal – Multi-Asset Strategist at Schroders

Many institutional investors set 60/40 benchmarks with the intended aim of delivering performance in excess of inflation. Often this is in the hope that this might bring returns of more than 3% (often 5%) per annum (p.a.) above inflation.

But is this realistic in the current environment? Should investors change their benchmarks or their return expectations (or both)?

1. What has a 60/40 benchmark delivered in the past?
In figure 1, we show rolling five-year performance of a typical 60/40 benchmark, and compare it to rolling five-year CPI .

(Throughout this article, we use Bloomberg Barclays Global Aggregate Bond Index (hedged to USD) for global bonds, and MSCI AC World USD for global equities unless stated otherwise).

We also show the median five-year returns for the 60/40 benchmark. This shows that while the five-year p.a. returns of the 60/40 benchmark are variable through time – and indeed more variable than CPI – the benchmark has on average been equivalent to around CPI+4.2% p.a. over rolling five-year periods (the blue line represents the median 60/40 return which over time has averaged 4.2% more than CPI).

Click here to read more...