When 60/40 no longer delivers

The traditional 60/40 investment approach to multi-asset portfolios may no longer suffice, according to new analysis from research and ratings house, Zenith.

Releasing its multi-asset sector report, Zenith pointed to the manner in which events over the past 12 months had confounded traditional approaches, including 60/40.

It a modelling exercising, it said the mean-reversion scenario, the forecast return for the 60/40 portfolio is approximately 4.4% p.a., was well below the prior returns experience.

“Further, Heuristics long-term projection for domestic CPI is 2.25% p.a., meaning Balanced investors are facing a potential return shortfall over the next decade,” the Zenith analysis said.

“While the forecast is subject to input sensitivity, it highlights that a 60/40 portfolio can no longer rely on structural tailwinds from declining bond yields and rising equity market valuations to meet return objectives.”

The Zenith analysis said that to mitigate potentially lower returns and the ability of fixed income to diversify equity risk, the Multi- Asset peer group continued to expand its tool kit with respect to implementing lowly-correlated active management strategies; designed to perform in a range of market conditions.

“Zenith highlights that active management is increasingly being used as a source of diversification, performing multiple roles such as controlling downside risk, generating performance in different macro/ inflationary regimes or expressing interest rate duration or credit views. Moreover, this can also include adjusting currency hedge ratios or investing in traditional asset classes in diversifying or safe-haven currencies (i.e. global bonds in US Dollars).”

“Examples of these strategies include stratifying equity portfolios to express country, factor and sector views, or expanding the mix of defensive sub-asset classes such as emerging market debt (local), securitised credit and high yield securities.”