(Bloomberg) -- The traditional 60/40 portfolio -- alleged by some investors to be dead -- is regaining some of its luster as bonds start to offer more value, according to Singapore’s sovereign wealth fund GIC Pte.

The strategy of mixing 60% stocks with 40% bonds, a mainstay at global pension funds for decades, has come under fire in recent months after debt prices plunged amid soaring inflation and tighter monetary policy. Yet with US real yields rising almost 2 percentage points, the 60/40 portfolio is slowly coming back, according to one of the world’s biggest sovereign funds.

“We were concerned about 60/40 mainly because the valuations were stretched,” said GIC Chief Executive Officer Lim Chow Kiat. “There has been some restoration of value.” 

GIC is hunting for better returns as global equity markets tumble. Its five-year nominal returns fell to 7.7% for the fiscal year ended March 31, down from 8.8% the previous year. The annualized 20-year real return of 4.2% also fell slightly. All figures are in US dollars, and the fund doesn’t publish one-year results.

Speaking to Bloomberg News about the annual report, Lim said the threat of inflation hasn’t gone away, meaning bonds are still not particularly appealing. The fund cut holdings of nominal bonds and cash to 37% of assets from 39% the previous year.

“Some restoration of value doesn’t mean it’s become so attractive,” Lim said.

High inflation and weaker demand mean that “margins are likely to get squeezed, and that is a headwind for virtually all of our equity-type investments,” said Chief Investment officer Jeffrey Jaensubhakij. While favorable demographics had helped China and other developed markets, “we’re on the backside of that now and will continue to be a headwind for some time,” while globalization looks like it’s peaked, he said.

The portion of GIC’s portfolio held in developed and emerging market equities fell during the fiscal year, while real estate and private equity holdings rose. The fund increased its US exposure to 37% from 34%, while assets in Asia dropped to 32%.

GIC is preparing for a hard year ahead, with Jaensubhakij identifying four key pressures making investing less predictable: increasingly polarized politics, geopolitical tensions, disruption caused by technology companies and changing rules around sustainability. Many of the developed markets in which the firm invests have recorded dramatic falls in the first few months of GIC’s fiscal year.

“We are relatively well-prepared – we maintained a more cautious stance coming into this, we have so-called dry powder so if there are opportunities we would like to be able to deploy and we have a few hundred people focused on that,” Lim said, referring to the almost 800 investment professionals at the firm.

GIC’s success is vital for Singapore. Investment gains from GIC, the central bank and state investor Temasek Holdings Pte have been the biggest contributors to the national budget since 2018.

GIC, which doesn’t publish its assets under management, is estimated to run about $799 billion, according to consulting and research company Global SWF. Another research firm, SWFI, pegs the assets at $690 billion.

 

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