Safe Equities: An Alternative Allocation to Bonds

Stephen Penman and Julie Zhu

Financial Analysts Journal, 2025, vol. 81, issue 1, 63-81

Abstract: An allocation of investment funds between equities and bonds, commonly a 60/40 split, is often advised to provide some protection from the risk in equities while still maintaining an equity exposure. However, in recent years when equity and bonds have been positively correlated, bonds have failed to provide the desired protection. This paper reports on an alternative: an allocation to relatively safe equities within a 100% equity portfolio. These safe equities, identified by fundamental analysis, provide a hedge in equity market drawdowns but with upside return: positive skewness with limited downside. An empirical analysis confirms this benefit, both in periods when equity and bond returns were positively correlated and when they were negatively correlated.

Date: 2025
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DOI: 10.1080/0015198X.2024.2437982

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