How BlackRock’s Rick Rieder would reimagine the 60/40 portfolio with today’s higher rates

The balanced portfolio – which typically allocates 60% of assets toward stocks and 40% to fixed income –could use a rethink in today’s higher rate environment, according to BlackRock’s Rick Rieder. “For 30 years, fixed income was a hedge,” said Rieder, the asset manager’s global chief investment officer of fixed income, in a phone call with CNBC. The circumstances have changed since then, as the Federal Reserve set off on its policy-tightening campaign in March 2022, eventually leading to a fed funds target rate of 5.25% to 5.5%. Central bank policymakers, including Fed Chair Jerome Powell, have been adamant about the ” lack of further progress ” this year on inflation, suggesting that rates will likely stay high for a while. Accordingly, that could call for a fresh approach to the traditional 60/40 asset allocation, which aims to offer diversification but hit a rough patch in 2022 when bonds and equities suffered price declines. “How you build balance in a portfolio and how you use fixed income has to be different,” Rieder said. A 60/30/10 split Rather than a 60/40 split toward equities and fixed income, Rieder said he would consider a 60/30/10 allocation if he had to build a balanced portfolio. That is, he’d maintain a 60% allocation toward stocks, but keep 30% of the portfolio in “higher income, shorter duration” assets. Duration is a measurement of a bond’s price sensitivity to fluctuations in interest rates, and issues with longer maturities tend to have greater duration. Rieder said he would commit the remaining 10% toward other holdings including bespoke private credit and some alternatives. An asset class that fits the bill in the “higher income, shorter duration” bucket would be highly rated collateralized loan obligations, Rieder said. “You can create real yield that’s in the [6% range] for a triple A-asset without taking a lot of long-term interest rate [risk],” he added. So-called CLOs are securitized pools of floating-rate loans to businesses, which can include loans to non-investment grade borrowers. The AAA-rated tranches are the least risky in the CLO space, as they are first to get paid in the event a company goes bankrupt. CLO ETFs recently came under Bank of America’s coverage , and strategist Jared Woodard noted that floating-rate loans have bolstered the performance of CLOs in a higher-for-longer rates backdrop. In addition to AAA-rated CLOs, Rieder also likes European investment-grade credit as a U.S. dollar investor. “They are super high quality, and you get a nice yield of 5.5% to 6%,” he said. “The big secret is that people underestimate that cash flow really works, income really works, and if you’re not taking a lot of risk, it becomes a good supplement to your portfolio,” Rieder said.