Two of the world’s largest sovereign wealth funds say investors should expect much lower returns going forward in part because the typical balanced portfolio of 60/40 stocks and bonds no longer works as well in the current rate environment.

Singapore’s GIC and Australia’s Future Fund said global investors have relied on the bond market to simultaneously juice returns for decades, while adding a buffer to their portfolio against equity market risks. Those days are gone with yields largely rising.

“Bonds have been in retrospect this gift,” with a 40-year rally that has boosted all portfolios, said Sue Brake, chief investment officer of Australia’s A$218.3 billion ($226 billion) fund. “But that’s over,” she added, saying “replacing it is impossible -- I don’t think there’s any one asset class that could replace it.”

Thanks to declining returns from bonds, the model 60/40 portfolio may eke out real returns after inflation of just 1%-2% a year over the next decade, said Lim Chow Kiat, chief executive officer of GIC. That compares with gains of 6%-8% over the past 30 to 40 years, he said.

“So that’s not particularly exciting,” Lim said at the Investment Management Association of Singapore-Bloomberg conference on Tuesday.

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Brake said funds like hers will have to work harder to diversify their portfolios to seek out returns. She cited six major ways in which markets have changed with the pandemic, including increased regulatory intervention, higher inflation risks, additional drivers of performance and more “fragile” markets.

Funds have “cried wolf” for over a decade in warning of falling returns, Brake said, only to see continued gains. Nevertheless investors should expect lower returns ahead, she said. Global bonds have gained 382% since 1991, or about 5.4% a year, based on the Bloomberg Barclays Global Aggregate Index.

“We’re repeating the same message that going forward the returns are going to be much harder,” said Brake, whose fund has returned 9.2% a year over the past decade. “You can’t hide in the corner and not invest any more because we have to get our returns and I don’t think it’s the kind of environment where we should be doing that.”

Norway’s $1.3 trillion ($1.75 trillion) sovereign wealth fund has already made the shift, winning approval to adjust its equity-bond mix to 70/30 in 2017. At the end of last year, it held about 73% in equities, and 25% in bonds.

Lim also cautioned about too much government stimulus and its effect on inflation.

“As a long-term investor, we have some concerns about the use of stimulus,” he said. “We tend to like the use of capital and money that goes toward building long-term growth, long-term structural factors, rather than using the money to spend.”

Investors will also have to deal with geopolitical risks, said Lim, whose fund has posted a real return of 2.7% annualized over the past 20 years.

“This is a chronic issue,” said Lim. “It is going to stay with us for a long time and we are likely to have occasional flare-ups, just like any chronic disease. You have to manage it properly.”