The 60/40 Portfolio is Dead, Long Live the 60/40 Portfolio!
For the past 40 years, many would say the traditional 60/40 portfolio has ruled as the King Exemplar of asset allocation.
Since the 1980s, investors have had a sort of “set-it-and-forget-it” approach to getting attractive risk-adjusted returns–with a total return similar to the S&P 500 but with a lower risk profile.
Not anymore, according to the likes of Meb Faber, who recently tweeted it’s “likely to be the worst year ever for a traditional 60/40 stocks and bonds portfolio”
In a recent blog by our very own CIO, Mark Scalzo, he asks, “Is a traditional 60/40 portfolio still an effective tool for generating attractive total returns and protecting from downside risk?“
If it’s true that we may be experiencing the end of the 60/40 portfolio, what happened, and what’s the alternative?
A Brief Look at the Origin of Asset Allocation and Professional Money Management
Remember the 80’s and 90’s? It was all about managing your money like an institution, as more and more platforms came out with their very own separately managed account (SMA) programs–pretty much based on Modern Portfolio Theory created by Harry Markowitz in 1952.
In the 1970s, EF Hutton started to let retail advisors give their clients access to institutional money managers. Check out this EF Hutton commercial that originally aired in the 1970s. Soon, all the big wire houses would follow suit and roll out their own money management platforms to the retail market.
In 1992, Morningstar introduced the style box, which came to rule the day as it expanded equities to include a large and small cap on the vertical access and growth and value on the horizontal, with fixed income organized by interest rate sensitivity and credit quality, respectively.
By the end of the ‘90s, an expanded equity style box included Mid Cap, Small/Mid Cap (SMID), Deep Value, Growth at Reasonable Price (GARP), and Momentum. And platforms like SEI, PGIM, Assetmark, Brinker, and Envestnet were on their way to widespread distribution.
By 2010, every advisor would have easy access to professional money management–from SMAs to mutual funds, ETF’s and beyond. However, these programs typically came with high minimums limiting access to the average investor.
In 2012, Validus joined FolioMetrix (an RIA I founded in 2009) as a subadvisor, where we created an alternatives investment database that indexed over 500 strategies across 4 different categories.
And in 2017, Morningstar introduced the Style Box for alternative funds–organized by correlation and relative volatility and included Long-Short Credit, Long-Short Equity, Managed Futures, Market Neutral, Multi-Alternative, and Option Writing.
Today investors have easy access to practically any kind of investment in just about every format. Companies like Crowdstreet and Seedinvest give investors direct access to private real estate and startup companies of every kind. And with over 7,000 listed mutual funds and more than 2,500 ETFs, you can be sure if you can invest in it, there’s probably a fund that will help you do it.
Heck, there are even closed-end funds that trade on the NYSE. They give you access to a wide array of private investments and potential income–like the Destra Multi-Strategy Fund (Ticker: DMA) that we are the subadvisor to.
As global assets have grown to more than $200 trillion, the low correlating benefits of traditional asset allocation have diminished over time. This does not mean it doesn’t work anymore, it just means a deeper understanding of how things work is required–making institutional money managers more essential than ever.
The King is Dead, Long Live the King!
In a nutshell, the value proposition has always been to give individual retail investors access to institutional money management. But only in the past decade has technology truly democratized the field, providing a growing selection of investment options at lower and lower minimums.
But with more options come complexity, and complexity is the enemy of simplicity. The good news is the same technology that makes investing more accessible allows professional money managers to scale their work, which makes what they do easier to access as well.
The seemingly contradictory phrase, “The King is Dead, Long Live the King,” announces the death of the previous monarch, while, at the same time assuring continuity by saluting to the one who takes its place.
Alternative ways of managing risk and investing for growth and income will continue rapidly evolve. Let the traditional 60/40 stocks and bonds portfolio serve as a reminder of how simple things can be and as a foundation for a brave new world of investing.
Long live the 60/40 portfolio!
Validus Growth Investors, LLC seeks to invest in companies at every stage of their growth. From startups to publicly traded companies, our research identifies inflection points that have the potential to produce meaningful growth and income for the clients we serve.
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