Rethinking the 60/40 Portfolio – InvestmentNews

Nic Millikan CFA, CAIA

The proven simplicity and effectiveness of the portfolio’s composition of 60% equities and 40% fixed income securities were the main reasons for its durability. But times are changing. Given that market conditions for the foreseeable future are unlikely to produce the results that have made the combination successful in the past, now may be the time to consider a modified approach to portfolio allocation. To research new ways to achieve clients’ investment goals, InvestmentNews Create recently sat down with Nic Millikan, Managing Director and Head of Investment Strategy at CAIS, the alternative investments platform. The discussion, edited for length and clarity, follows.

InvestmentNews Create: Before discussing why it may be a good idea to revisit the traditional 60/40 asset allocation, discuss why it has proven popular and useful for so long.

Nick Millikan: The short answer is that, for a large part of the population, it worked. From March 2009 until the onset of recent stock market volatility, a 60/40 portfolio returned 11.1% per year, on average, with a standard deviation of 8.4% and a Sharpe ratio of 1.27 %. It can be really attractive on a risk-adjusted basis, so it’s no wonder the performance and relative simplicity of the 60/40 portfolio has helped endear it to investors. But the recent past offered a near-perfect set of conditions as stocks rose as bond prices rose. So investors not only benefited from bonds providing a safety cushion, but they also boosted performance. But interest rates have now gone as low as they can hypothetically go and stocks appear to be fully priced, so the 13-year party is probably over. Unfortunately, many investors may not realize this.

InvestmentNews Create: How should investors and their advisors adjust their thinking?

Nick Millikan: First, it’s important to recognize that it’s not easy to change your approach, especially as equities loom large in the minds of investors. They see stock news and commentary on TV and talk about it with friends. And since we have been in a strong bull market, despite declines, for 13 years, many investors have greater confidence in their own stock-picking ability; others have concluded that professional active management brings little added value. As with bonds, the inverse relationship between yield and price can confuse investors.

Despite the challenge of the current investor mindset, it is important to note that banks and asset managers have scaled back their assumptions about future equity returns and are also forecasting interest rates slightly lower. higher. This translates into an investment environment that is likely to be different in the coming years, which means now is a good time to re-evaluate the 60/40 portfolio and look at the use of alternative investments, including performance generally does not depend on the direction of the markets.

InvestmentNews Create: Why should an advisor consider adjusting their asset allocation strategy to include alternative investments?

Nick Millikan: The alternatives provide the opportunity to examine a broader set of opportunities. Investments that fall under the alternatives umbrella have varied characteristics and are actively managed, which can help weather headwinds. Also, some alternative strategies and vehicles – like long-short investing or venture capital, for example – don’t need stock markets to rise to be successful. They can often zigzag when the market zags.

InvestmentNews Create: What are some of the key considerations when investing in alternatives?

Nick Millikan: The biggest issue is relevance; do the alternatives correspond to the profile of an investor? The extent to which an investor is willing to give up some liquidity for the potential for higher returns is likely to be taken into consideration since some alternative investments, such as private equity, have holding periods of up to eight ten years, while others, such as hedge funds, may only require a one to two year commitment. Additionally, the performance dispersion among alternative asset managers is typically several times greater than among traditional mutual fund managers for example. Manager selection can therefore be very important, and since there is usually some persistence in performance among alternative managers, due diligence to identify skills that persist is very important.

InvestmentNews Create: How should advisors frame the alternative investment conversation with their clients?

Nick Millikan: I would start by saying that allocations that have worked in the past may not work in the future, and ultimately may turn out to be riskier than adjusting a portfolio to hold assets whose performance is n is not correlated to the movement of the markets. Fortunately, due to technological developments, there are now new tools that advisors can use to access a wide range of alternative asset classes and strategies. Moreover, these alternative choices have been democratized in recent years thanks to innovation and are more accessible than ever to a wider range of investors.

InvestmentNews Create: How can advisors find the tools they need to support their clients in exploring an alternative strategy?

Nick Millikan: Advisors need an easy-to-access resource. At CAIS, we specialize in providing advisors with the resources, tools and training they can use to help their clients maximize the value of alternative investing. Knowing what to say and how to say it, advisors can have the confidence they need to prepare their clients for the different market environment that awaits them.

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