Asset managers hash out the future of the 60/40 portfolio

For a lot of investors, moving beyond the classic allocation of 60% stocks and 40% bonds will mean a bigger allocation to alternatives and other active strategies.

The unprecedented sting of 2022, when both stocks and bonds finished the year in the red, is still rippling across the financial advisory space, and the aftermath was on full display Wednesday in Chicago at the Morningstar Investment Conference.

Approaching the issue using the broadest possible scope, three asset managers were charged with debating whether the classic portfolio of 60% stocks and 40% bonds is now dead, alive or somewhere in between.

“Anytime there’s a significant equity market downturn, the question comes up, ‘Is 60/40 dead?’” said Joel Dickson, global head of advice methodology at Vanguard.

“It’s really a discussion about strategic asset allocation,” Dickson said. “I do worry that the 60/40 discussion is a discussion about looking backwards and fighting the last war.”

Although the generic 60/40 portfolio has a long-term average annual return of about 6%, the strategy saw a 15% decline last year, which is giving asset managers and financial advisors plenty to ponder.

When asked where he stood on the question of whether 60/40 was dead or alive, Philip Green, head of the global tactical asset allocation team at BlackRock, responded that he is the “bloodied camp,” reflecting the contentious nature of that debate.

“Last year was a unique set of circumstances,” Green said. “Correlations between stocks and bonds long term are typically positive, but moderately positive. Last year was very extreme and an event I would argue is not repeatable.”

In many respects, the debate over the benefits and future of a 60/40 portfolio is just a reason to kick around the asset classes and strategies represented by the equity and bond slices, and also introduce the case for diversifying beyond stocks and bonds.

Catherine LeGraw, asset allocation specialist at GMO, said the key differentiator has been diversifying into alternative investments to navigate around some of the turmoil that can confront traditional asset classes.

“We mostly used liquid alts as our defensive strategy last year,” she said.

But just as 60/40 isn’t really that specific for most clients, the introduction of alternative investments is equally nuanced and can introduce even more questions.

“What is the price of diversification and does it actually add for an investor at the end of the day, net of fees and net of taxes?” Dickson asked.

Green was also less than supportive of anything that looked like a knee-jerk move into alternatives.

“Liquid alts is an active strategy; don’t think there’s any magic going on,” he said. “You’re introducing factor exposures into your portfolio.”

Regarding the carnage of 2022, the panelists seemed to agree that inflation was the big culprit.

“Inflation is not always a bad thing, even if it’s higher for longer,” said Green. “What matters for markets is surprises. It’s less the level of inflation and more the surprise. If there’s another inflation surprise, stocks and bonds are going down again, but they might not go down as much as last year because things are different now.”

Dickson agreed, describing 2022 as “the manifestation of the biggest risk to a 60/40 portfolio, which is an unexpected acceleration of inflation.”

“It was a year that highlighted the risk for new retirees of what they could draw down from their portfolio to fund their retirement,” he added.

When it comes to defending against inflation now, LeGraw recommends Treasury Inflation Protected Securities, commodity futures, liquid alts and solid public companies.

“Quality stocks tend to outperform junky stocks during an inflationary period,” she said.

[More: Investment Portfolio allocations: Is 70/30 the new 60/40?]