The 60-40 portfolio, or the traditional 60% allocation (shares) 40% (bonds) it remains a mantra for many investors even as it exposes them to significant risk. So Amadeo Alentorn of Jupiter AM that the “motivation behind the 60-40 portfolio is the pursuit of diversification: the hope is that if equities go down, bonds, as a separate asset class, can be uncorrelated and offset.”
“The search for diversification is always valid, but in our opinion” continues Alentorn “the allocation to only two asset classes (long-only equity and long-only bond) is not sufficient”.
The 60-40 portfolio: a look at history
“Looking back, from 1928 to 2022, a portfolio allocated 60% to the S&P 500 index and 40% to the 10-year US Treasury yield had an overall negative return for 21 non-consecutive years, between one-quarter and one-fifth of the total number of years considered.
In this long period, 2022 was the third worst year for the 60-40 portfolio, preceded by 1931 and 1937 argues Alentorn, according to whom “it is quite surprising that it went so badly, because the economic situation in 2022 was nowhere near as desperate as that of the Great Depression of the 1930s or the mortgage and banking crisis of 2008”.
Identify two main reasons:
“on the one hand stock prices became very volatile in the second half of 2020 and throughout 2021, on the other hand in the spring of 2021 the Fed started raising interest rates, disrupting the bond market after a long period of very low rates”.
The result is that “the stock market crash in 2022 was accompanied by the worst calendar year yield (-17.8%) on 10-year US Treasuries over the entire period 1928-2022”.
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The 60-40 portfolio problem
The expert then explains the 60-40 portfolio problem:
“In our opinion, it does not include sufficient sources of diversification. Instead, investors may want to consider including a broader range of asset classes in their portfolios than they do only stocks and long-only bonds”.
In particular, explains the Jupiter AM expert, “neutral equity funds compared to the market, they are to be understood as a type of asset class other than long-only equities. Market neutral funds hold a long and a short portfolio, designed not to be swayed by stock market movements. If their returns are positive, it is thanks to other sources, such as the factors that play orthogonal to the market”.
“Our investment approach is designed not to be influenced by stock market movements, but to extract alpha from five proprietary stock selection criteria, which incorporate intuitive investment factors such as value, quality, growth and momentum”, Amadeo Alentorn concludes.