 Gold remains a useful diversifier because of its uncorrelated relationship with other asset classes.
As a “liquid real asset” It has inflation-protecting characteristics. Gold provides protection against geopolitical risks and insurance against market shocks. Read in full View all our Gold & Precious Metals research  [5 min read, open as pdf]
Why does the UK equity allocation decision matter so much The difference between the best performing and worst performing multi-asset discretionary investment managers has largely been a function of one key decision: to what extent have they had a UK equity home bias? Home bias means having an above index-weight in your domestic market. Academic research on home bias tends to be written from a US perspective, so its conclusions are less relevant for UK asset allocators. Within equities, the performance differential between the US and UK has been so extreme over the last decade or so , that this has been the singlemost important decision that has impacted portfolio performance – far more so than any active or passive debate, or active fund selections. For financial advisers that rely on third party asset allocation providers, the decision has been made for you, and your clients’ portfolio performance becomes a function of your chosen risk profiling tool. For the last decade or so, multi-asset portfolios that have had a low or no UK equity home bias have performed best. Those that have a high bias have performed worst. Choose your strategic asset allocation carefully To show this, see the chart below which shows the “Capital Allocation Line” linking the UK Risk Free Rate (SONIA) to a) world equity risk-return (represented by an index-tracking ETF), b) UK equities risk-return (represented by an index-tracking ETF), and c) a 80/20 allocation between the two. The risk-return for a 20%, 40%, 60%, 80% and 100% equity/cash portfolio would sit on each Capital Allocation Line with increasing increments of volatility (as percentage equity risk broadly translates to the proportion of annualised equity volatility). Portfolio performance is broadly a function of which Capital Allocation Line a portfolio’s Strategic Asset Allocation has been constructed around. When reviewing multi-asset managers, it makes sense to do so relative to these Capital Allocation Lines. Fig.1. Multi-asset portfolios are built with no, partial, or high home bias [see pdf version] Given the stark relative performance between portfolios built with a high bias and those built with no bias, it’s no surprise that UK institutional investors and UK wealth managers have been gradually deallocating from their home market. Adding to the UK market’s woes, its weight in global equity indices has also been shrinking. UK equities in a multi-asset portfolio The gradual relative shrinkage of UK equities within global equity indices is well documented. The decline has become more noticeable since December 2019 as the tech rally started to gain pace. UK listed companies now make up approximately just 4% of the global equity benchmark. Put differently, the largest US technology company is today worth almost the same as the entire FTSE 100. It wasn’t forever so. UK equities have shrunk from representing about 10% of global equities (developed and emerging markets combined) as recently as 2011. The shrinkage is a function of simple maths. A far greater number of the rest of the world’s listed companies (predominantly the US) have grown their earnings (and hence market capitalisation) far more than the UK’s listed companies. As a result, the UK’s relative size has shrunk. The problem is now being compounded by the number of large, listed companies shrinking further as some move their listings to the US to obtain a better valuation, and others being acquired and becoming privately owned. To reverse this trend, London needs to remain an attractive destination to base, list and grow companies from around the world. UK wealth managers have been de-allocating gradually UK discretionary investment managers have been deallocating from UK equities as they removed their “home bias.” In 2000, approximately 70% of a “balanced” portfolio’s equity allocation was in UK equities based on MSCI PIMFA (formerly FTSE APCIMS data[1]), compared to 33% today. This allocation is determined to be reflective of PIMFA’s member firms by an index committee including representatives from leading UK wealth managers[2]. The chart below shows the UK equity proportion or “home bias” used in UK wealth management benchmarks based on MSCI PIMFA and FTSE APCIMS data, and an estimate of the UK equity allocation within global equity index funds. Fig.2. UK wealth managers have gradually reduced their home bias over time [see pdf version] How much is enough? In our work with UK financial advisers and wealth managers, we found a range of opinions. We have always considered a UK equity allocation of 30-50% to be too high, even though that was often the existing default for firms using third party asset allocation models and the largest UK wealth managers that govern the reference benchmarks above. Whilst intellectually we can (and did) make the case for no home bias[3] (consistent with other institutional investors and consultants), we found that adviser firms in the retail market (and indeed their end clients) would be more focused on the FTSE 100 and would want and expect to see a range of UK-focused funds in a portfolio. Furthermore, whereas the well-known SPIVA®[4] studies evidence that in highly efficient markets (such as the US) it is challenging for active managers to persistently outperform the index, the same studies show that in less efficient markets (such as UK small-caps), active managers can persistently outperform the index[5]. On this basis, we alighted on a target 20% UK equity allocation as a mid-point between a high bias of 40% and no bias (index weight). Twenty’s plenty Deciding what UK equity allocation to have is a key part of a strategic asset allocation discussion for investment committees of wealth management firms and financial adviser firms alike. For those that rely on third-party asset allocation models, the decision is made for you. A benchmark where the strategic asset allocation is constantly changing can be a challenge to evaluate long-run performance as the framework is always changing. In our multi-asset indices for GBP-based investors[6], we therefore use this static 20% UK home bias equity allocation as a “neutral” for the entire index history and going forward. This means that our benchmark has a consistent (unchanging) framework, that creates a theoretical “neutral” allocation, which UK managers and advisers can either adopt or allocate against. Whilst customising an index to reflect one view won’t keep everybody happy, the failure to cutomise an index to incorporate a UK equity home bias could create even greater controversy as some managers have found out[7]. Interestingly the proposed £5,000 UK ISA Allowance would make up 20% of a total £25,000 ISA contribution, so we remain comfortable with a 20% UK equity allocation within our multi-asset indices. UK equities as a diversifier Whilst US and World Equities have persistently outperformed the UK equity market, we think the UK equity market is looking interesting once again not just from a valuation perspective, and not necessarily from a returns perspective, but primarily as an equity portfolio diversifier owing to its decorrelation from the US. The structure of the UK equity market (low valuation, value/yield bias, old-world defensive sectors such as energy, mining, healthcare) is so different to the structure of the US equity market (high valuation, growth bias, new-world technology sector concentration), that they complement each other rather well as a diversifier. Recall 2022, the inflation shock from the Russia/Ukraine war and related sanctions meant that the UK equity market was up, when the US and hence world equities were down. Similarly this year, the UK equity market has frequently moved inversely to the US and World equities. Fig.3. US and World Equities move lock-step, UK equities do not [see pdf version] Whilst US and World equities move lock-step, the different return “pattern” for UK equities makes it an interesting diversifier from a portfolio construction perspective: The measure of “true diversification” is correlation. By combining lower correlated assets, the risk of the whole can be less than the sum of parts. Long-term and short-term correlations both matter When building long-term strategic asset allocation models, asset allocators look at long-term risk, return and correlation structure (either forward-looking estimates or historical data) and refresh this every few years. Using 10 year historic data as at end 2023, the US and UK correlation to world equities is 0.97 and 0.80 respectively. However to understand current market conditions and how portfolios are actually behaving, it is also important to look at short-term correlations. Using rolling 1 year correlation data, the US and UK correlation to world equities is 0.97 and 0.61 respectively. Hence a portfolio built using long-run estimates will look very different to one built using short-run estimates. This is why we believe in an adaptive approach to asset allocation that considers both long-run and short-run, risk and correlation structure. Fig.4. Long-run and short-run correlations are similar for the US but different for the UK [see pdf version] The changing nature of UK equity correlation As US equities make up a growing concentration of world equity indices, it is unsurprising that the short-run rolling 1 year correlation between US and World Equities remains consistently high (they move lock-step, as discussed above) and in line with its long-run figure. By contrast, the short-run 1 year correlation of UK vs World Equities is not stable. We can see two clear periods of material disconnect. One following Brexit and the second following Covid and subsequent related inflation shock and the marked by divergence between tech-oriented US market and value-oriented UK market. The chart below is why we are currently positive on the UK equity market. Not just on valuation grounds, not just as a region- or sector-based diversifier, but as a genuinely less correlated market. Its lower correlation to World Equities, unlike the US, enables risk-based diversification within a portfolio’s equity allocation. Fig.5. UK Equity has become less correlated with world equities increasing its diversifier status [see pdf version] For a defensive approach, think dividends The UK equity market returns are underpinned by dividend generation. Looking at the returns of the FTSE All-Share Index Total Returns (which includes reinvested dividends) and the FTSE All-Share Price Index (which assumes dividends are paid out and not reinvested), we can see that reinvested dividends represent 41.6% of cumulative total return of the UK equity market from 2008 to 2023 (see below). This should prove even more defensive in challenging markets. Fig.6. FTSE All Share: Total and Price Return and reinvested income contribution to returns [see pdf version] Summary Whilst there have been significant recent outflows from UK equity funds, perhaps investors are missing one key consideration: that of decorrelation. Having more than one global equity fund provides no diversification from a risk perspective. They will likely move broadly in tandem, regardless of which active manager, and regardless as to whether its active or passively managed. But pairing a global or US equity fund with a UK equity fund introduces true (risk-based) diversification within the equity portion of a portfolio because of the UK’s low correlation and very different and sometimes opposite return pattern. [1] This is the current version of a long-standing index series currently called the MSCI PIMFA Private Investor Indices. The original FTSE APCIMS Indices were renamed FTSE WMA Private Investor Indices in 1q14. The WMA transferred its Private Investor Indices to MSCI from 1st March 2017, and they were renamed MSCI PIMFA Private Investor Indices on 1st June 2017, following the merger of the Wealth Management Association (WMA) and Association of Professional Financial Advisers (APFA). We have combined the asset allocation history of the above indices to create a single time-series. [2] The MSCI PIMA Private Investor Indices have an asset allocation determined by its index committee that aims to ensure that the asset allocation is reflective of its member firms. The index committee includes representatives from Canaccord Genuity Wealth, Investec Wealth and Investments, Rathbones, JM Finn, Brooks MacDonald, Killik & Co, Close Brothers, Evelyn Partners, Quilter Cheviot and others. For more information, see https://www.pimfa.co.uk/about-us/pimfa-groups/private-investor-indices-committee/ [3] See our July 2020 article https://www.elstonsolutions.co.uk/insights/home-equity-bias-is-irrational-and-has-been-penalised-uk-investors [4] See our October 2021 article https://www.elstonsolutions.co.uk/insights/understanding-spiva [5] See our December 2022 article https://www.elstonsolutions.co.uk/insights/are-active-managers-improving [6] See https://www.elstonsolutions.co.uk/our-indices.html for more information [7] https://www.peelhunt.com/news-insights/articles/selling-down-the-uk/  [5 min read, open as pdf]
 Henry Cobbe explores the challenges of building portfolios for retirement and also sizing "right" allocation to UK Equities.
Read the article / access the podcast  Markets don't stand still. Should portfolios?
We explore two apparently opposing schools of thought. Read the full article in FT Adviser  [5 min read]
In the ultra-low interest rate era that followed the financial crisis, there was little incentive to allocate to cash. But should the promise of a now-meaningful risk-free return prompt investors to switch away from equities? Read the full article in FT Adviser These rules of thumb stand the test of time. Investor's Chronicle interviews Elston's Henry Cobbe.
Read in full  [3 min read, open as pdf]
The costs of investing compound and have a negative impact on your ultimate return. Henry Cobbe is interviewed by Investor's Chronicle.
Read in full  [5 min read, open as pdf]
Some 18 year olds will have their Child Trust Fund maturing. Depending on how their parents had invested it, that could mean a lot or a little start to adult life. Our Head of Research, Henry Cobbe, provides some suggestions as regards next steps for an 18 year old with £29,000 to invest First of all – I’m sure you’ve done a big thank you to your parents for having set up, and topped up your CTF to grow it thus far! Everyone had the same starting point with CTFs, but it’s the decisions that your parents made that has determined your portfolio thus far. You should ask your parents’ adviser to help you get started, but if you really want to manage your own portfolio for now, rather than take advice, I would encourage you to make a straightforward three-step plan. 1. Choose your platform Firstly, decide on a platform. Interactive Investor’s flat-fee account is great for much larger pots, but your pot size means it’s much of a muchness between them and the other well-capitalised providers like Fidelity, AJ Bell and Hargreaves Lansdown. For a detailed analysis of platform fees, take a look at comparefundplatforms.com Using their tool, and assuming £29,000 lump sum ISA, £50 per month top up into 2 funds and no switches (buy and hold!), a like for like comparison suggests Interactive Investor 0.32% annual fees, AJBell 0.35%, Fidelity 0.35% and Hargreaves Lansdown 0.45%. Take a look at each website, decide which you find to be most helpful, and easiest to navigate. Customer service is important too, so try calling their helpdesks and see you find most helpful! 2. Choose your funds Secondly, decide on which funds, if you have a specific amount that you would ear-mark for the property deposit, and you expect that it’s in ten years’ time, you could consider using a target date fund, like Vanguard Target Retirement 2030 Fund Acc (0.24% OCF) or Vanguard Target Retirement 2035 Fund Acc (0.24% OCF) for that portion and ear mark that as your “deposit pot”. This means that as you get towards the target date, the investment strategy becomes less risky. That way the pot earmarked for your deposit is less exposed to a market shock if there is one in the run-up to you wanting withdraw funds for your deposit. For the remainder of your pot, as you’re lucky enough to have youth on your side, you have what’s called high “capacity for risk” in economic terms (not related to your behavioural/emotional “attitude to risk”), so can afford to take risk for long-term investments as the necessary flipside of returns. So for the remainder have a look at low cost global equity index funds such as:
3. Keep topping up Finally – and most importantly – heed the words of Warren Buffet in his advice to retail investors: “keep topping up through thick and thin, and especially through the thin”. The minimum fund subscription is £25 per month, so set up a regular investment plan into your chosen funds. The power of tax-free compounding is a marvel to behold. If markets have a wobble and you have spare cash, that can be a great time to top up with whatever you can afford. Lump sum or phased in? Markets are quite volatile at the moment so once you’ve got the money into your ISA, make a plan to invest into your chosen funds proportionally in say three or four stages over the rest of the year. That way you are “averaging in” to the market, rather than either getting very lucky (buying at a market low), or very unlucky (buying at a market high). Whilst in the long-run (say 30 years) it won’t matter (according to academia), it does make a difference to how you feel about taking the plunge, and can help remove a lot of worry. Set a date for review Make a plan as to when you will check in to your account – monthly, quarterly or annually. You would also need to rethink your strategy if your situation changes, or if your goals change. Whilst young and care-free you are probably right in your analysis that you may not need an adviser at this stage. But also put a date in your diary to speak to one when you’re any or all of 30, in a marriage/civil partnership, or starting a family. A good financial planner will review your situation and make sure that you have all the right things in place: mortgage, will, insurance, consolidated pensions, making the most of tax allowances and a broader plan to achieve your medium and long-term financial goals, whilst squaring off key financial risks. Good luck with the start of your investing journey! Notice: Not a personal recommendation. No assessment of suitability. Personal opinions expressed do not reflect the views of the author’s employer. Self-directed investors should read the terms and conditions and risk warnings of their selected platform, together with the KIID of any fund they select. In this podcast, Henry Cobbe explores behavioural biases in an interview with Investor's Chronicle.
Access the podcast  [5 min read, open as pdf]
In our 2022 outlook, we explained why inflation will remain hotter for longer and will settle above pre-pandemic levels. Advisers should consider how to adapt portfolios for inflation across each asset class – equities, bonds and alternatives. Research demonstrates how different asset classes exhibit different degrees of inflation protection over different time-frames. Equities therefore provide a long-term inflation hedge.
In this article, we explore how to adapt portfolios for inflation within and across each asset class: Equities, Bonds and Alternatives. For full article, read as pdf With thousands of funds available, learn how to sort the wheat from the chaff. Elston's Henry Cobbe is interviewed by Investor's Chronicle.
Read the article Watch the video  [Open as pdf]
Money market funds, and their exchange-traded equivalents “ultra-short duration bond funds”, are an important, if unglamorous, tool in portfolio manager’s toolkit. They can be used in place of a cash holding for additional yield, without compromising on risk, liquidity or cost. Money market funds are intended to preserve capital and provide returns similar to those available on the wholesale money markets (e.g. the SONIA rate that replace LIBOR). How risky is a money market fund? Money market-type funds hold near-to maturity investment grade paper. Their weighted average term to maturity is <1 year. They therefore have very low effective duration (the sensitivity to changes in interest rates). Compare gilts which are seen as a low-risk asset relative to equities. The 10-11 year duration on UK gilts (all maturities) means they carry a higher level volatility compared to cash (which has nil volatility). On the flip side, their longer term also means they have higher risk-return potential relative to cash and ultra-short bonds. By contrast, money market type funds have some investment risk as they hold non-cash assets, but given their holdings’ investment grade status, short term to maturity and ultra-short effective duration, they exhibit near-nil volatility. Platform cash, fixed term deposit or money market fund From a flexibility perspective and a value for money perspective, there's a clear rationale to hold money market funds, rather than platform cash or a fixed term deposit. Our Money Markets fund research paper that looks at 4 low cost money market funds sets out why Why does the fund structure make sense? Find out more in our CPD Webinar on Introduction to Collective Investment Schemes  [3 min read, open as pdf]
The active vs passive debate is nothing new: the first index fund was launched in 1976 to track the S&P 500. In 1991, Nobel prize winner, William Sharpe (of Sharpe ratio fame), wrote a paper on “The Arithmetic of Active” setting out some of the clichés articulated by active managers, and why, in his view, it’s a zero sum game. Definition terms is key Whenever the active vs passive debate kicks off it’s always important to define terms. If referring to an asset allocation process, we prefer the terms static and dynamic and that’s got nothing to do with the subject of this paper or the claims by index investors that “active” is a zero sum game. Nor does the “activeness” or otherwise of hedge funds. The zero-sum game allegation relates to security selection, typically in a long-only context and therefore most relevant to managers of portfolios of securities and/or retail funds. What the Sharpe paper says Broadly speaking the Sharpe paper argues that in a closed world of active managers (stock pickers within an asset class), where the opportunity set is the index, for every “star” manager buying and holding the best performing stocks, there is a “dog” manager to whom the worst performing stocks have been sold. In aggregate, over time, this means the combined performance of both managers is the same as the index less active fees. This makes it hard for active managers to persistently outperform the index over time, which is evidenced by the SPIVA study. On this basis, using a fund that delivers performance of the index less passive fees seems like a more efficient way to gain exposure to that opportunity set. What are the implications for fund pickers The SPIVA study shows that the ability of active managers to outperform an index persistently varies from market to market depending on the efficiency of that market. For example, US and Global Equity markets fewer managers manage to outperform. For UK and Emerging Markets, active managers achieve better results. The latest SPIVA scorecard can be found here. We are not against “true active”, but the “arithmetic” is stacked against traditional long-only retail managers when it comes to persistency of alpha. Incorporating an index based approach where markets are highly efficient, and or where the availability of “true active” managers is rare. How to identify “true active” is a topic for another day! 
[3 min read, open as pdf]  [ 5 min read, open as pdf]
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:  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.  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.  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.  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/  [3 min read, open as pdf] Inflation is on the rise Easy central bank money, pent up demand after lockdowns and supply-chain constraints mean inflation is on the rise. Will Central Banks be able to keep the lid on inflation? The risk is that it could persistently overshoot target levels.  It matters more over time Inflation erodes the real value of money: its “purchasing power”. If inflation was on target (2%), £100,000 in 10 year’s time would be worth only £82,035 in today’s money. But on current expectations, it could be worth a lot less than that.  Real assets can help
A bank note is only as valuable as the value printed on it. This is called its “nominal value”. Remember the days when a £5 note went a long way? When inflation rises, money loses its real value. By contrast, real assets are things that have a real intrinsic value over time whose value is set by supply, demand and needs: like copper, timber, gold, oil, and wheat. Real assets can also mean things that produce an regular income which goes up with inflation, like infrastructure companies (pipelines, toll roads, national grid etc) and commercial property with inflation-linked rents. Rethinking portfolio construction Including “real assets” into the mix can help diversify a portfolio, and protect it from inflation. Obviously there are no guarantees it will do so perfectly, but it can be done as a measured approach to help mitigate the effects of inflation. The challenge is how to do this without taking on too much risk. Find out more about our Liquid Real Assets Index |
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