Stock returns but bond stability: mixed funds are attractive again

In the short term, the recovery in interest rates has put many mixed funds under pressure. However, in the current market environment, funds that many investors had already deregistered can once again fully exploit their strengths. Thanks to positive real interest rates, long-term return expectations for multi-asset portfolios are rising.

The low interest rate environment that investors had become accustomed to since the financial crisis is history. Thanks to significant interest rate increases by central banks over the past two years, interest rates have also returned to the bond markets. And even if it can be assumed that central banks will start lowering interest rates again in the second half of the year, it is likely that in the coming years they will be set at a significantly higher level than investors are accustomed to in the past. recent.

From the perspective of long-term investors, higher interest rates are good news and probably the best economic and financial development in the last 20 years. Because a higher initial interest rate means that higher bond returns can be expected over the next ten years. Vanguard currently expects an average return of 3.4 percent for euro zone bonds over this period. Just two years ago, before the interest rate hike cycle began, this forecast was zero percent.

And since inflation is also falling at the same time, this interest rate is likely to exceed the inflation rate, which means positive real interest rates. This makes bonds much more attractive again and adding securities to the mix is ​​interesting for investors, although it generally makes sense to divide investment assets between stocks and bonds, regardless of the market environment, to cushion fluctuations in stocks. Actions. markets.

Expectations for mixed funds are better than in years

The favorable market environment is now also giving an additional boost to mixed funds, which invest their assets in both the stock and bond markets. Unlike previous years, the bonds in the fund's portfolio no longer only serve to reduce risk, but also as an additional source of income. This means that long-term return expectations for mixed portfolios have increased significantly.

Vanguard currently forecasts an average annual return of 4.3 percent over the next ten years for a portfolio with 40 percent stocks and 60 percent bonds. At the end of 2021, this prediction was a meager 1.3 percent. For the 60/40 specular portfolio it is 4.5 percent, up from 2.0 percent in December 2021.

At the same time, volatility forecasts sometimes differ considerably. The average volatility of a series of stock portfolios is 19.2 percent, well above the fluctuation ranges of the 40/60 and 60/40 portfolios, with similar return expectations.

These expectations alone should encourage investors to once again take advantage of the benefits of mixed or multi-asset funds. There is also another aspect: bonds benefit from higher interest rates, especially in the current situation. Mixed funds with a lower proportion of stocks are therefore particularly attractive to risk-averse investors to offset the volatility of global stock markets. Therefore, balanced portfolios will continue to be relevant for investors in the future.