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Is the 60/40 portfolio still fit for purpose
May 2023. The 60/40 portfolio consists of 60% equities and 40% bonds. Equities provide capital appreciation but with volatility. Bonds provide lower, predictable returns and are less volatile. In fact, the equity/bond split is then adjusted for individuals’ risk tolerance, but the term 60/40 portfolio is a catch-all which represents all diversified portfolios. This bond equity split has traditionally fared well and achieved an annual return of 5% per annum over the last 30 years.
2022 called into question this formula when the 60/40 portfolio returned -18.4%. Both bonds and equities fell in unison and didn’t exhibit the diversification benefits that they have traditionally, as higher interest rates prompted investors to demand lower prices for both equities and bonds. After such a poor year, the question was raised, is the 60/40 portfolio still fit for purpose.
In 2023, the debate around the future of the 60/40 portfolio is encapsulated in the divergent approaches of the world’s two largest asset managers. Blackrock has stated that the 60/40 portfolio isn’t well positioned for the current inflationary backdrop as bonds are again at risk of underperformance. They advise the inclusion of non-traditional investments for further diversification.
Vanguard, the world’s second largest asset manager has forecast a return for the 60/40 portfolio of 6.1% per annum over the next decade, given that the fall in the stock & bond markets during 2022 gave scope for a recovery in returns. So far, Vanguard appears to have called it correctly as the 60/40 portfolio has already returned +5.5% in 2023.
However, investors should be aware that this debate is not about whether diversification is worthwhile, it is about the form it takes. BlackRock advises hedge funds and other active investment strategies which could benefit from falling asset prices as well as rising ones. For most diversified portfolios, non-traditional alternative investments are already part of the strategy.
A sceptic might ask whether this is a corporate strategy which aims to encourage Blackrock’s mainly passive, cost-sensitive investor base to branch into assets which command higher fees. For Vanguard on the other hand, which has traditionally touted the benefit of low-cost passive investing, they advise staying the course.
In our portfolios, we believe both in diversification beyond equities and bonds, as well as keeping portfolio costs low, and to that extent we believe both arguments have merit.
James Hunter-Jones, Senior Investment Manager
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