Elston supports UK financial advisers CIP/CRP/MPS
  • WHO WE ARE
    • About
    • Our Journey
  • WHAT WE DO
    • Elston MPS >
      • Our Portfolios
      • Adaptive Portfolios
      • Retirement Portfolios
      • Multi-Asset Income
      • Money Market Portfolio
    • Custom MPS >
      • Custom Portfolios
    • CGT Solutions >
      • Our CGT Solutions
      • GIA Portfolios
      • Onshore Bonds
      • Direct Gilts
    • Adviser Support >
      • Our Adviser Support
      • CIRP
      • Investment Committee Support
      • Regulatory Support
      • Analytics, Factsheets & Reporting
      • CPD
    • Fund Solutions >
      • Our Funds
      • Custom Funds
    • Index Solutions >
      • Our Indices
      • Elston Multi-Asset Indices
      • Sector Equal Weight
      • UK Equity Income
      • Liquid Real Assets
      • Gold and Precious Metals
      • Custom Indices
  • WHO WE HELP
    • Financial Advisers
    • Discretionary Managers
  • Insights
  • Contact

Asset Allocation Research for UK Advisers

60/40: The Arguments For and Against

14/5/2021

 
Picture
[ 5 min read, open as pdf]

  • 60/40 portfolios are under review
  • We look at the arguments both for and against
  • With inflation on the rise, it's time to rethink the “40"
 
Since an article published in 2019 pointed the historic lows in bond yields, many investment firms are starting to rethink the 60/40 portfolio.  This came under even more scrutiny following the market turmoil of 2020.
While some affirm that the 60/40 will outlive us all, others argue against this notion.
We take a look at the main arguments for and against and key insights

What is a 60/40 portfolio?
A 60/40 equity/bond portfolio is a heuristic “rule of thumb” approach considered to be a proxy for the optimal allocation between equities and bonds.  Conventionally equities were for growth and bonds were for ballast.
The composition of a 60/40 portfolio might vary depending on the base currency and opportunity set of the investor/manager.  Defining terms is therefore key.
We summarise a range of potential definitions of terms:
Picture
Furthermore, whilst 60/40 seems simple in terms of asset weighting scheme, it is important to understand the inherent risk characteristics that this simple allocation creates.
For example, a UK Global 60/40 portfolio has 62% beta to Global Equities; equities contribute approximately 84% of total risk, and a 60/40 portfolio is approximately 98% correlated to Global Equities[1].

[1] Elston research, Bloomberg data.  Risk Contribution based on Elston 60/40 GBP Index weighted average contribution to summed 1 Year Value At Risk 95% Confidence as at Dec-20.  Beta Correlation to Global Equities based on 5 year correlation of Elston 60/40 GBP Index to global equity index as at Dec-20.
Picture
Why some think 60/40 will outlive us all.
The relevance of 60/40 portfolio lies in its established historic, mathematical and academic backup. Whilst past performances do not guarantee future returns, it nonetheless provides us with experience and guidance. (Martin,2019)
Research also suggests that straightforward heuristic or “rule-of-thumb” strategies work well because they aren’t likely to inspire greed or fear in investors. They become timeless. Thus, creating a ‘Mind-Gap’. (Martin,2019)
In the US, the Vanguard Balanced Index Fund (Ticker: VBINX US) which combines US Total Market Index and 40% into US Aggregate bonds, plays a major role in showcasing the success of the 60/40 portfolio that has proved popular with US retail investors (Jaffe,2019).  Similarly, in the UK the popularity of Vanguard LifeStrategy 60% (Ticker VGLS60A) showcases the merits of a straightforward 60/40 equity/bond approach.
In 2020, for US investors VBINX provided greater (peak-to-trough) downside protection owing to lower beta (-19.5% vs -30.3% for US equity) and delivered total return of +16.26% volatility of 20.79%, compared to +18.37% for an ETF tracking the S&P 500 with volatility of 33.91%, both funds are net of fees.  In this respect, the strategy captured 89% of market returns, with 61% of market risk.
Picture
For GBP-based investors in 2020 the 60/40 approach had lower (peak-to-trough) drawdown levels (-15%, vs -21% for global equities) owing to lower beta.  The 60% equity fund delivered total return of +7.84% with volatility of 15.12%, compared to +12.15% for an ETF tracking the FTSE All World Index with volatility of 24.29%.  In this respect, the strategy captured 65% of market returns, with 62% of market risk.
Picture
Why some think 60/40 has neared its end
Since its inception the 60/40 portfolio, derived 90% of the risk from stocks. In simple terms, 60% of the asset allocation of the portfolio was therefore the main driver of the portfolio.  Returns (Robertson,2021).  This hardly a surprise given that equities have a 84% contribution to portfolio ris, on our analysis, but the challenge made by some researchers is that if a 60/40 portfolio mainly reflects equity risk, what role does the 40% bond allocation provide, other than beta reduction?

The bond allocation is under increasing scrutiny now is because global economic growth has slowed and traditionally safer asset classes like bonds have grown in popularity making bonds susceptible to sharp and sudden selloffs. (Matthews,2019)

Strategists such as for Woodard and Harris, for Bank of America and Bob Rice for Tangent Capital have stated in their analysis that the core premise of the 60/40 portfolio has declined as equity has provided income, and bonds total return, rather than the other way round.. (Browne,2020)

Another study shows that over the past 65 years bonds can no longer effectively hedge against inflation and risk reduction through diversification can be done more adequately by exploring alternatives such as private equity, venture capital etc. (Toschi, 2021).  Left unconstrained, however, this can necessarily up-risk portfolios.

With bond yields at an all-time low, nearing zero and the fact that they can no longer provide the protection in the up-and-coming markets many investors query the value provided by a bond allocation within a portfolio. (Robertson,2021)
 
Key insights
While point of views might differ about 60/40 as an investment strategy, one aspect that is accepted is that the future of asset allocation looks very different when compared to the recent past.  Rising correlations, low yields have led strategists and investors to incorporate smarter ways of risk management, explore new bond markets like China, create modified opportunities for bonds to hedge volatility through risk parity strategies, as well as using real asset exposure such as real estate and infrastructure. (Toschi, 2021)

Research conducted by The MAN Institute summarises that modifying from traditional to a more trend-following approach introduces the initial layer of active risk management. By adding an element of market timing investors further reduce the risk, when a market’s price declines.

While bonds have declined in yield, they still hold importance in asset allocation for beta reduction.
Further diversifying the portfolio with an allocation to real assets has potential to provide more yield and increased return than government bonds.
 
Summary
The 60/40 portfolio strategy has established itself over many decades, it has seen investors through four major wars, 14 recessions, 11 bear markets, and 113 rolling interest rate spikes.

It has proved resilience as a strategy and utility as a benchmark.

Our conclusion is that 60/40 is not dead: it is a useful multi-asset benchmark and remains a starting point for strategic asset allocation strategies.

​But the detail of the bond allocation needs a rethink.  Incorporating alternative assets or strategies so long as any increased risk can be constrained to ensure comparable portfolio risk characteristics.
 
Henry Cobbe & Aayushi Srivastava
Elston Consulting
 
Bibliography
Browne, E., 2021. The 60/40 Portfolio Is Alive and Well. [online] Pacific Investment Management Company LLC.
Available at: https://www.pimco.co.uk/en-gb/insights/blog/the-60-40-portfolio-is-alive-and-well
Jaffe, C., 2019. No sale: Don’t buy in to ‘the end’ of 60/40 investing. [online] Seattle Times.
Available at: https://www.seattletimes.com/business/no-sale-dont-buy-in-to-the-end-of-60-40-investing/
Martin, A., 2019. The 60/40 Portfolio Will Outlive Us All. [online] Advisorperspectives.com.
Available at:https://www.advisorperspectives.com/articles/2019/11/11/the-60-40-portfolio-will-outlive-us-all#:~:text=As%20two%20recent%20commentaries%20demonstrate,40%20will%20outlive%20us%20all.
Matthews, C., 2021. Bank of America declares ‘the end of the 60-40’ standard portfolio. [online] MarketWatch.
Available at:https://www.marketwatch.com/story/bank-of-america-declares-the-end-of-the-60-40-standard-portfolio-2019-10-15
Robertson, G., 2021. 60/40 in 2020 Vision | Man Institute. [online] www.man.com/maninstitute. Available at:https://www.man.com/maninstitute/60-40-in-2020-vision
Toschi, M., 2021. Why and how to re-think the 60:40 portfolio | J.P. Morgan Asset Management. [online] Am.jpmorgan.com.
Available at: https://am.jpmorgan.com/be/en/asset-management/adv/insights/market-insights/on-the-minds-of-investors/rethinking-the-60-40-portfolio/

Comments are closed.

    ELSTON RESEARCH

    insights inform solutions

    Get our weekly newsletter

    Categories

    All
    All Weather Portfolio
    Alternative Assets
    Alternative Strategies
    Bonds
    Business Practice
    Capital Market Assumptions
    CPD
    Direct Gilts
    Equities
    Equity Income
    Equity Sectors
    ESG
    ETFs
    Evidence Based Investing
    Factor Investing
    Geopolitics
    Gold & Precious Metals
    Guide To Investing
    Index Investing
    Inflation
    Investment Trusts
    Macro
    MULTI ASSET
    Multi Asset Income
    Net Zero
    Outlook
    Permanent Portfolio
    Podcast
    Portfolio Construction
    Private Markets
    Real Assets
    Retirement Investing
    Risk Parity
    Thematic Investing
    Value Factor
    Video

    Archives

    May 2025
    April 2025
    March 2025
    February 2025
    January 2025
    December 2024
    November 2024
    October 2024
    September 2024
    August 2024
    July 2024
    June 2024
    May 2024
    April 2024
    March 2024
    February 2024
    January 2024
    December 2023
    November 2023
    October 2023
    September 2023
    August 2023
    July 2023
    June 2023
    May 2023
    April 2023
    March 2023
    February 2023
    January 2023
    December 2022
    November 2022
    October 2022
    September 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    September 2019
    June 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    July 2017
    May 2017
    March 2017
    February 2017
    January 2017
    November 2016
    October 2016
    September 2016
    July 2016
    June 2016
    May 2016
    February 2016
    January 2016
    August 2015
    June 2015
    January 2014
    June 2012

    RSS Feed

Company
Home
About
​Our Journey
​​​Contact
Terms of Use
​Our Solutions
​​Insights
​Our Portfolios
Custom Portfolios
​Retirement Portfolios
Our CGT Solutions
Our Funds
Custom Funds
Our Indices
Custom Indices
​Adviser Support
CIRP
Investment Committee Support
Regulatory Support
Analytics, Factsheets & Reporting
CPD


By client type:
For Advisers
For Discretionary Managers


© COPYRIGHT 2012-25. ALL RIGHTS RESERVED.
 Elston Consulting Limited (Company Registration Number 07125478) is registered in
England & Wales, Registered address:  1 King William Street, London EC4N 7AF
  • WHO WE ARE
    • About
    • Our Journey
  • WHAT WE DO
    • Elston MPS >
      • Our Portfolios
      • Adaptive Portfolios
      • Retirement Portfolios
      • Multi-Asset Income
      • Money Market Portfolio
    • Custom MPS >
      • Custom Portfolios
    • CGT Solutions >
      • Our CGT Solutions
      • GIA Portfolios
      • Onshore Bonds
      • Direct Gilts
    • Adviser Support >
      • Our Adviser Support
      • CIRP
      • Investment Committee Support
      • Regulatory Support
      • Analytics, Factsheets & Reporting
      • CPD
    • Fund Solutions >
      • Our Funds
      • Custom Funds
    • Index Solutions >
      • Our Indices
      • Elston Multi-Asset Indices
      • Sector Equal Weight
      • UK Equity Income
      • Liquid Real Assets
      • Gold and Precious Metals
      • Custom Indices
  • WHO WE HELP
    • Financial Advisers
    • Discretionary Managers
  • Insights
  • Contact