17 December 2020
VanEck Blogs | Emerging Market Bonds
Does 60/40 Still Work in China?

The classic 60/40 portfolio has been challenged due to the extremely low yields in developed markets currently, with prospects for a meaningful increase appearing unlikely any time soon. This has driven many investors to increase their risk exposure to maintain an adequate yield, by increasing allocations to non-core asset classes such as high yield credit, emerging markets debt and equity income. While these can provide an attractive yield pickup, they do not come without additional risks. In addition, an investor’s exposure to equity markets increases with these asset classes due to their higher correlation to stocks, increasing the risk of drawdowns and higher volatility.

Outside of the U.S., however, there are still opportunities to use a broad fixed income allocation as both a yield enhancer as well as a diversifier and risk-reducer within a diversified portfolio. China’s onshore bond markets, in particular, may be attractive to the growing number of investors seeking exposure to that country’s impressive economic growth and ongoing transformation into a consumer led economy. Adding bonds to an equity exposure historically has helped to increase risk adjusted returns by lowering volatility and drawdowns. A simplified analysis using two asset classes, large cap equities (represented by the CSI 300 Index) and investment grade aggregate fixed income (represented by the ChinaBond China High Quality Bond Index) helps to illustrate this. Although an efficient frontier analysis would suggest a much higher allocation to bonds to optimize the risk/return tradeoff, we think a 60/40 allocation serves as a useful benchmark. Since we believe the asset allocation decision within China is distinct from the currency analysis, we show the risk and return statistics in both CNY and USD terms.

Growth of a Balanced China Portfolio

Growth of a Balanced China Portfolio
February 2012 through November 2020
  Return Std Dev Sharpe Ratio Max Drawdown Yield
  USD CNY USD CNY USD CNY USD CNY  
Onshore Bonds 3.94 4.44 4.52 2.78 0.72 0.69 -7.14 -3.78 3.55%
A-Shares 10.14 10.67 24.81 23.47 0.48 0.47 -42.98 -39.78 1.80%
China 60-40 8.34 8.86 15.52 14.01 0.55 0.53 -27.20 -23.11 2.50%

Source: Morningstar and Bloomberg, as of 11/30/2020.

The blended portfolio provides not only a higher yield, but also a significantly improved risk adjusted return due to the negative correlation between the two asset classes. Volatility and maximum drawdown of the 60/40 blend is nearly 40% lower than an all-equity exposure, while capturing 0.70% of additional annual yield. A blended portfolio may also benefit from the many tailwinds that we expect onshore bonds to benefit from going forward, including positive real yields, several potential sources of support for CNY and increasing inflows from international investors. We believe a less aggressive tone from Washington D.C. may also benefit a China oriented portfolio.

IMPORTANT DEFINITIONS & DISCLOSURES  

This material may only be used outside of the United States.

This is not an offer to buy or sell, or a recommendation of any offer to buy or sell any of the securities mentioned herein. Fund holdings will vary. For a complete list of holdings in VanEck Mutual Funds and VanEck Vectors ETFs, please visit our website at www.vaneck.com.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Van Eck Associates Corporation or its subsidiaries to participate in any transactions in any companies mentioned herein. This content is published in the United States. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed herein.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.

Fran
Fran Rodilosso
Head of Fixed Income ETF Portfolio Management, CFA

Important Definitions & Disclosures

This material may only be used outside of the United States.

This is not an offer to buy or sell, or a recommendation of any offer to buy or sell any of the securities mentioned herein. Fund holdings will vary. For a complete list of holdings in VanEck Mutual Funds and VanEck Vectors ETFs, please visit our website at www.vaneck.com.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Van Eck Associates Corporation or its subsidiaries to participate in any transactions in any companies mentioned herein. This content is published in the United States. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed herein.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.