The Death of 60-40
The Death of the 60-40 Balanced Portfolio, Why it No Longer Works, and Alternative Strategies
December 2, 2020
By: Arun Kaul
Changes in the marketplace have created the need to rethink many of the more traditional “rules of thumb” regarding appropriate asset allocation and portfolio positioning in order to be successful going forward. One of these rules of thumb is the “60/40” rule to create the “right” moderate portfolio. Jim Robinson, CEO of Robinson Capital, recently penned a thought piece entitled “A Brief History of the 60/40 Balanced Portfolio—Cradle to Grave in 40 Years” arguing that the strategy for allocating “60/40” to create a “moderate” portfolio is outdated and unlikely to work for investors moving forward, and that investors will now be required to seek out alternative income sources to meet clients’ needs. Robinson’s main points as to why 60/40 does not work anymore are threefold.
1. Minimal Principal Protection—the Barclays Aggregate Bond Index closed last month with a yield of 1.2% and a duration of 6.1 years—a 5 basis point quarterly rise in rates will cause a negative return.
2. Negative Carry—the S&P 500 has a dividend yield that is 0.5% higher than the yield on the Barclays Aggregate Bond Index— every dollar allocated to bonds from stocks is reducing an investor’s expected annual income.
3. Positive Correlation—investors have become hyper-sensitized to central bank activities—what is good for bonds is good for stocks, and what is bad for bonds is bad for stocks.
Robinson Capital offers an alternative to the traditional 60-40 model through multi sector-broad diversification strategies, Robinson Capital uses these diversified strategies combined with disciplined analysis of fixed income markets to provide consistent performance. Through the identification of long-term trends and favorable risk/return scenarios using multiple strategies throughout the fixed income markets, Robinson Capital is able to produce reliable results. A broad approach reduces the reliance on any one source of return generation. Discipline is maintained through our extensive use of proprietary analytical tools and set allocation ranges. In addition, they place a high degree of concentration on protecting the portfolio from downside risk, an integral part of managing fixed income portfolios. Robinson Capital’s overall investment objective is to add consistent value over time using numerous portfolio designs, while maintaining volatility and risk, to a minimum.