Portfolios that split their assets between stocks and bonds may be poised to return to the historical pattern of divergent performance and lower volatility they provided investors in the past, according to Fidelity’s Chris Lee.
“Doing so would reverse the trend in 2022, providing potential for market participants to better endure what could be a choppy and uncertain market for the remainder of 2023,” says Lee, lead portfolio manager of Fidelity® Balanced Fund (FBALX).
2022 was a historically challenging year for so-called balanced portfolios, highlights Lee, as the S&P 500® index and the Bloomberg U.S. Aggregate Bond Index—the most widely followed benchmarks for U.S. equities and investment-grade bonds, respectively—each posted a double-digit decline for the first calendar year since 1969.
This tendency to produce divergent results is one factor that makes balanced portfolios attractive to investors, Lee contends: A decline in one part of the portfolio generally tends to be at least partly offset by a gain in the other, thus dampening overall volatility.
In seeking to generate both income and capital growth, the fund invests across a mix of stocks and bonds, with a 60%/40% neutral asset allocation. As of May 31, the fund had roughly 63% of assets allocated to equities and 37% invested in fixed-income securities.
“Late in 2022, the yield on two-year U.S. Treasuries (then about 4%) surpassed the yield of the average utility stock in the S&P 500® index for the first time since 2007,” Lee points out.
He believes this is noteworthy because since 1990, when short-term bond yields have been higher than utilities, long-term bonds have often outperformed stocks over the next 12 months.
What’s more, says Lee, lower inflation could make it more likely that the U.S. Federal Reserve will end its cycle of higher policy rates at some point this year, which could contribute to elevated long-term bond prices.
The bottom line, concludes Lee, is that, although stock volatility is still possible at some point this year, he believes that bonds—due to their higher yields compared with the start of 2022—could reassert their historical role and help cushion equity volatility within a 60/40 portfolio.
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Chris Lee is a chief investment officer, multi-manager strategies in the Equity division at Fidelity Investments.
In this role, he acts as the chief investment officer for Fidelity's stock selector investment teams to ensure overall consistency in the management of these funds including; Fidelity and Fidelity Advisor Balanced Fund, Fidelity VIP Balanced Portfolio, Fidelity Series All Sector Equity Fund, Fidelity and Fidelity Advisor Stock Selector Mid Cap Fund, Fidelity and Fidelity Advisor Stock Selector All-Cap Fund, and the FIAM Global Sector Strategies: U.S Large cap core, U.S. Small/Mid Cap Core, Global Core, and Global ex-U.S.
Prior to assuming his current responsibilities, Mr. Lee was a Managing Director of Research overseeing the health care and cyclical teams and was portfolio manager of several sector and thematic strategies. He joined Fidelity as an equity analyst in 2004 and has served in various investment roles including analyst, portfolio manager, and sector leader.
Before joining Fidelity, Mr. Lee was an associate in the Technology group at TA Associates, a private equity firm in Boston. Previously, he worked as a financial analyst in the Technology group at Robertson Stephens. He has been in the financial industry since 1997.
Mr. Lee earned his bachelor of arts degree in East Asian studies from Yale University and his master of business administration degree from the Massachusetts Institute of Technology (MIT) Sloan School of Management.