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Asset managers dealing with trillions of dollars are warning clients to take a heavy defensive position in bonds in the face of rising equity prices and expectations that the Federal Reserve will be reluctant to lower interest rates further.
Vanguard's core model released as part of the 10tn asset manager by 2025 now requires financial advisers and certain wealthy investors to allocate 38 per cent of their portfolios to stocks and the rest to fixed income. Those recommendations drop from 41 percent in 2024 and 50 percent in 2023, almost flipping the popular 60/40 portfolio on its head.
“For an investor who is willing to take a little risk and deviate from a portfolio of long-term policies, we think the risk would make sense,” Todd Schlanger, senior investment strategist at Vanguard, said in an interview.
Vanguard's latest forecast was boosted after the November election of president-elect Donald Trump and his Republican allies in Congress, which led to the stock's initial sell-off. While investors have been bullish on the prospects of Trump's “Maganomics,” economists have been predicting a bleak outlook due to concerns about rising prices and interest rates.
Vanguard's support for fixed income exposure follows two years of coverage US equity performance – a bull that has made stocks look expensive to some. The S&P 500's price-to-earnings ratio, a commonly used valuation measure, grew from about 19.2 in September 2022 to nearly 30 this week.
Invesco's solutions arm also recommends increased exposure to fixed income, and a focus on equity holdings in defensive sectors such as health care, consumer staples and utilities.
Charles Shriver, portfolio manager at T Rowe Price, said his team remained in equities but was biased towards value stocks, avoiding growth companies in favor of “attractive value properties”.
“Stocks look very expensive historically,” said Will Smith, head of high yield at AllianceBernstein. “It will be very difficult to have stock returns over the next decade nearly as high as they have been over the past decade.”
The approach of choosing bonds over equities fell out of favor last year when the S&P 500 closed for its second consecutive strong year, Schlanger acknowledged, noting that Vanguard's “time-varying asset allocation” model has a 10-year horizon in mind.
“You can have these moments of inefficiency,” he said. “But we were still looking at the model as doing what it was supposed to do and trying to manage the risks involved, realizing that as US equities continued to rise in value, the potential for lower returns and the potential for downside increases.”
The S&P 500 enjoyed a bounce after Trump's decisive victory in November, advancing to a record high below 6,100 on December 6. But the markets have been off since then, and 2024 ended on a low note in equities with no “Santa Claus” rally to go. to be found.
“The electoral market is losing momentum,” said Alessio de Longis, head of investment at Invesco Solutions.
“In short, our view is that growth is slowing down,” he added. “The evidence that inflation is falling sharply is not really there.”