The 60-40 stock/bond portfolio mix is still valid for most financial advisory clients, despite the losses the investment mix suffered last year when both equities and bonds lost value.
Most advisors may continue to use the traditional equity/fixed-income benchmarks. But for some clients, added exposure to other asset classes, such as international markets or even liquid alternatives, could be an appropriate way to boost returns.
Still, it’s debatable whether to do it for the short term.
Those were among the views of BlackRock and Vanguard executives speaking at the Morningstar Investment Conference in Chicago on a panel of experts discussing asset allocation.
Joel Dickson, the global head of advice methodology at Vanguard, said the main thing is to create a strategic asset allocation that gets clients the returns they need according to their goals, time horizon and risk tolerance.
Also on the panel was Philip Green, head of the global tactical asset allocation team at BlackRock. According to Green, the losses suffered by 60/40 portfolios in 2022 were unusual because inflation was hurting both stocks and bonds, forging extreme positive correlations between them. He added, “We don’t see that as the base case going forward.”
The panelists discussed the idea of moving beyond benchmarks and seeking a new role for other types of assets, either in the short or longer term. Active manager Catherine LeGraw, an asset allocation specialist at GMO, said that if advisors stick with a static mix and don’t consider the broader market, they may lose out on return when some assets aren’t priced to deliver what a client needs. She pointed to the rock-bottom yields of fixed income in past years as an example.
“In the beginning of 2022, bond yields did not give you return or protection,” she said. “It was a great time to say you don’t need bonds. GMO used liquid alts as a defensive [allocation].”
She added that a lot of benchmarks, including the Bloomberg-Barclays aggregate bond index, don’t include credit assets such as high-yield bonds or emerging market debt. They also don’t include vehicles such as Treasury Inflation-Protected Securities (TIPS). Alternatives to traditional benchmarks, by contrast, offer an opportunity for return.
Money managers continue to worry about inflation and geopolitics, which LeGraw said are good reasons to move beyond 60/40 benchmarks. She recommended TIPS on the fixed-income side and commodities to replace some clients’ equity exposure, perhaps in futures or equity commodities.
Still, while alternatives can offer diversification benefits, Green and Dickson advised caution. Green suggested liquid alternatives can make portfolios more complicated, and that alternatives are more about boosting return in short-term opportunities than about portfolio resiliency.
Dickson said the cost of alternatives should also give advisors and investors pause. “What is the price? Does it add [return] to an investor at the end of the day? Or does it add [return] for the asset manager?”
Vanguard’s view, he said, has been that non-U.S. equities will probably have higher expected returns going forward than U.S. equities. “You know what, we'll be right eventually. But that's the whole point. If you start doing that in the portfolio, projecting returns, especially over relatively short-term periods, the portfolio is fraught with being swamped by volatility. That opens the door to poor outcomes,” he said.