Startseite
Podcasts
Thoughts on the Market Podcast
Beyond the 60/40 Portfolio?

Beyond the 60/40 Portfolio?

Thoughts on the Market vor 2 Jahren

0:00

4:48

Our Chief Global Cross-Asset Strategist explains why she sees a
future for the 60/40 portfolio strategy, which worked well for
over half a century and may continue to perform well – with some
modifications.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Serena Tang, Morgan
Stanley’s Chief Cross-Asset Strategist. Along with my colleagues
bringing you a variety of perspectives, today I’ll discuss the
future of the 60/40 equity/bond portfolio.

It’s Tuesday, July 16th, at 10am in New York.

Now investors have been asking: Is the 60/40 portfolio -- which
allocates 60 percent to stocks and 40 percent to bonds -- dead?
After all, the last two years saw some of the worst returns of
this strategy in decades. Now, we think the concerns about this
widely used strategy are not unfounded, but definitely a bit
exaggerated. Exactly how one thinks about the right mix of
equities and bonds within this type of portfolio though will need
to change.

The strategy of investing 60 percent of a portfolio in equities
and 40 percent in bonds to lower portfolio risk evolved from
modern portfolio theory in the 1950s. To succeed, bonds must be
less volatile than stocks and the correlation between stock and
bond returns can't be 1 -- because that would mean a perfect
positive correlation between stocks and bonds. And this
correlation has been below 1 and low for a long time because
growth and inflation have moved up and down in tandem for a long
time.

Now what does this have to do with anything, you may ask. Well,
typically in an environment where equities are rallying on the
back of strong growth, inflation is also increasing – which in
turn means that nominal yields stay high, dampening bond returns;
and vice-versa in a recessionary scenario. Now, in both of those
cases, the negative stock-bond return correlations is related to
the positive growth inflation correlation. Which explains why the
strategy of the 60/40 equity/bond portfolio worked so well for
decades, particularly in the low-vol, high-growth inflation
correlation, low stock-bond returns correlation environment of
the late aughts to 2010s.

Unfortunately for investors though, this has not been the
backdrop for the last few years. The highly unusual macro
environment coming out of pandemic broke that relationship
between growth and inflation, which in turn broke the
relationship between stocks and bonds, led to a spike in fixed
income volatility, and dragged bond returns to lowest levels in
decades over the last couple of years. But we believe these
factors will slowly normalize, which means 60/40-like strategies
should work again. While the levels of correlation and bond
volatility going forward may look different from history, and
definitely different from the QE period, as long as bonds have
lower risks than stocks – and there’s little to suggest they
won’t – bonds will continue to be good
diversifiers.

But it’s important for investors to ask themselves: what could
drive correlation between stocks and bonds going forward? Well,
longer term, the path of correlation between the two assets
depends in part on the relationship between economic growth and
inflation, as I touched on earlier. And this is where AI can come
in. Positive productivity shocks from GenAI tech diffusion and
the energy transition may change that dynamic between growth and
inflation. And at the same time, decoupling in the world’s key
economic regions as a result of the transition to a multipolar
world can alter the correlation between regional equities and
rates.

So, will the 60/40 portfolio be the strategy of the future? Or is
it going to be more like 70/30 or even 50/50? Slower
normalization of volatility and correlation means that a
portfolio with more equity could yield better risk/reward than a
60/40 mix. On the other hand, as the world’s 65+ year-old
population continues to grow over the next decades, this aging
demographic may demand higher allocations to less volatile
assets, even at the expense of lower returns.

Or maybe, just maybe, there is another solution. Instead of a
simple 60/40 like strategy, investors can look beyond government
bonds to other diversifiers, and building a multi-asset portfolio
with more flexibility.

Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.