There will be people fed up with me trying to explain macro-economics when I clearly don’t understand numbers. So me posting this chart as my chart of the week will annoy the experts.

But as most of us have had our money  invested in a 60:40 way (because that’s the way it should be done) this is a pretty worrying headline.

Have we been invested wrong all these years? That’s what the FT is asking.

You don’t need to study the chart below to know that those who have seen the best returns on their DC pots have been invested in close to 100% equities. What this chart is showing is a sophisticated version of that observation

What this shows is that before the start of this decade (the blue line takes you back 35 years from 2020), you didn’t get much extra return for having 100% stocks in your pension pot , infact you got much the same from 60:40 (meaning 60% in equities and 40% in bonds) but you didn’t take the risk.

Most DB funds are invested somewhere between 0 and 25% in equities and the vast majority of the money in bonds.  That looked a sensible way to have minimum risk with a little tickle of growth  which actually was less risky and offered a little more return. I can understand why big funds like the pension protection fund took that view.

But that view of the world has not worked since 2020, when there looks like no advantage in holding bonds. There are examples of pension funds who have done better by not investing in bonds, most famously the Miner’s pension fund which ditched bonds and went for equities and other growth strategies and has struck oil. Other more aggressive pension funds like LGPS have also found themselves almost embarrassingly rich after getting returns along the line that is red. Look at the outrageous outperformance of Kensington and Chelsea’s section as an extreme case of aggravating success (aggravating to everyone but council payers who’ve now got a free ride on pension payments.

If your DC default had been heavily invested in stocks, it’s you who should be laughing. If you’ve been invested in commercial master trusts like SEI’s and Aon’s or the massive Lifesight or even the tiny Lewis Investment Master Trust, you’ve outperformed the more economically correct (bond holding) rest! The rest includes all the insurers , Nest , NOW and People’s.

There are of course reasons why high growth strategies are frowned on by regulators, but they are based on the blue line not the red one. CDC funds are expected to invest towards the 100:0 end of spectrum (the 100 being equities and other growth strategies). But the regulator (this time TPR) will want to see more money in bonds as schemes grow more mature (it’s called “continuity planning” and it pleases most actuaries). There is little sympathy for the Miners or other mature schemes who want to take a long view.

As the FT’s Hakyung Kim observes when looking at her chart of blue and red lines

Looking at the average risk and return across various stock/bond weightings (using annual returns for the S&P 500 and 10-year Treasury), not only has risk increased all across the board since 2021, but bond returns have been negative. In short, correlation between stocks and bonds has turned positive, meaning bonds have started contributing to equity losses, instead of offsetting them.

I’ll save you the jargon of the macro-economists which complicates what Hakyung is asking

Should the 60-40 ratio be changed, or should Gilt exposure be reconsidered altogether?