The wariness among traders about the huge and important asset class has reached a new level. A Swiss bank with a history going back a long way has now taken a decisive step.
That's a first in the long history of Baumann & Cie (headquarters in the picture below). The Basel-based private bank, founded in 1920, has eliminated bonds from its asset allocation, according to its latest investment commentary.
In other words: henceforth, the portfolio of Baumann won't contain any bonds at all. An even larger amount of assets therefore will go into equities and real estate.
Very First Time
«It is the first time ever that we exclude bonds from the Baumann portfolio,» said Baumann investment strategist Simon Lutz in an interview. In the current environment of persistently low interest rates, it is a huge challenge to even maintain the value of a portfolio with investments in bonds, he added.
Baumann & Cie in any case traditionally preferred investment in equities, Lutz said. Bonds had always taken secondary importance in the investment strategy of the bank.
No More 60:40
It is most noteworthy that one of Switzerland's historic private banks stops putting any of its assets into the biggest asset class. In theory, no wealth manager can simply ignore the business with bonds that is worth $100 trillion. Typically, a portfolio contains 60 percent bonds and 40 percent equities.
No longer. With the pandemic, the recession that followed the lockdown and ultra-low interest rates, the traditional make-up of a portfolio has become a thing of the past. The economic conditions have pushed the return of bonds with a high rating into negative territory. That's while equity markets have soared. The «Financial Times» in June had suggested that the 60:40-portfolio may have reached the sell-by-date.
Unattractive
Indeed, it makes little sense to invest a majority of your assets in an asset class that has a negative return. And since June, the situation has become even more poignant and a major topic of discussion among investment professionals. Giants such as J.P. Morgan at the height of the crisis advised their fund managers to sell bonds and reinvest the proceeds into more risky papers with a higher yield.
Niche players such as investment boutique Loys won't mince their words: «The interest yield both this and on the other side of the Atlantic are so low that investments in U.S. government bonds have become unattractive if the exchange risk is taken into consideration.»
The U.S. treasuries, considered safe havens alongside the dollar, Swiss franc and gold, are out of favor. Which would have been unthinkable only a few months ago.
Just How Good an Investment?
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