A billionaire investment chief at the world's biggest hedge fund lays out 3 reasons why near-zero interest rates have created a 'problematic scenario' for portfolios

Bob princeBridgewater AssociatesBridgewater Associates co-CIO Bob Prince
  • Billionaire Investor Bob Prince told Bloomberg that near-zero interest rates have created a “very problematic scenario for any traditional investment strategy.”
  • The Bridgewater Associates co-CIO included three implications low rates have on portfolios: a low discount rate on earnings, a weak currency, and little risk diversification.
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Bob Prince told Bloomberg on Friday that low interest rates have created a “very problematic scenario for any traditional investment strategy.” The Bridgewater Associates CO-CIO laid out three of the largest impacts near-zero interest rates have on the equity market and a traditional investment portfolio.

Prince first detailed that near-zero interest rates have “taken the floor away on an equity decline.” In a poor economy, company earnings can tank and cause a decline in share prices. If bond yields are also down, this lowers the discount rate. “If you can’t lower the discount rate on those earnings the downside is bigger,” he said.

He also said that if interest rates cannot be lowered any further, “you can’t put a floor under the economy except through monetisation and fiscal policy.” Prince said the US is currently exercising these policy moves, but they can threaten the currency. The dollar index, which measures the performance of the dollar against six major currencies, has fallen to its lowest point in over three years.

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Lastly, Prince said that typically when equities are falling the bond rally tends to “diversify that risk away.” But according to Bridgewater Associates, roughly 80% of the market cap of local currency government debt has a yield below 1%. “You’re holding the equity side of it with not much downside protection, and you’re holding the bond side of it with asymmetric return patterns and zero yields,” Prince said.

These implications will be felt strongly for investors with 60% in equities and 40% in bonds, in a traditional “60-40 portfolio,” Prince added.

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