Investment strategy – Cover story
ment terms, and one of the reasons it may never die. This can be framed in the wise words of economist John Maynard Keynes: “It is better to be roughly right than precisely wrong.” For investors the 60/40 method does get it right most of the time. But for some, an investment approach cannot be built on something so vague. Even those who use it as their central investment approach may be looking to alternatives, some- thing with better returns, at least in the current environment. If investors are pondering a move away from 60/40, how much of a shift should they make – and in what direction? “Avoid the temptation to become more aggressive when invest- ment opportunities seem scarce,” Rekenthaler says. “Instead,” he adds, “maintain the same 60% equity position but consider reducing the portfolio’s bond-market risk by swapping into shorter notes or even raising cash. If long Treas- ury yields continue to rise, as they have done since summer 2020, those monies can gradually be reinvested into longer- dated securities.” Looking at much-cited alternatives, Brooke Turner also high- lights the importance of quantitative easing (QE) in the 60/40 story. “People argue for the use of alternatives in the mix, but all assets are priced off the risk-free rate and the business cycle. It has been the absence of the business cycle – thanks to QE – that has given the 60/40 portfolio such abnormally high returns as bond yields fell,” he says.
“If the business cycle is returning and QE evaporating, it will allow the 60/40 portfolio to resume its traditional place of pro-
viding modest capital growth and income, rather than a max- imising strategy, but it will be a painful process to get there for bondholders.” Even for a strong advocate of 60/40 like Mikulskis, there is a reason to modify it, even just slightly. “The traditional 60/40, which allocates between global stock markets and global gov- ernment bonds, can already be substantially improved upon by looking at real assets, corporate bonds, asset backed securities and private debt.”
Future strategies So does 60/40 have a future? Mitchell is cautiously critical. “A 60/40 approach, or similar construction, may continue to serve some investors and the risk profile they wish to take,” he says. “Public equity and bonds will continue to play important roles in investment strategies, but schemes should avoid being over concentrated in these familiar asset classes.” However, he notes: “Nest members tell us they want strong, steady returns rather than taking on excessive risk. We don’t want to leave them exposed to poor or negative performance over the coming years.”
In the LGPS, 60/40 has echoes of the old man on the cart in the movie Monty Python and the Holy Grail, shouting: ‘I’m not dead’.
Neil Mason, Surrey Pension Fund
And building on this by offering something of another vision to 60/40, Mitchell says: “We believe the key is continuing to create a more sophisticated investment strategy, not a simpler one. Opening up new asset classes like illiquids, as we have done recently with private equity, can help drive performance when public markets are struggling, giving us options when market conditions change.” In comparison, Mikulskis presents a different interpretation of 60/40. “The trend in the UK has been to measure invest- ment performance against objectives or liabilities. There’s nothing wrong with this, but a simple reference portfolio that encompasses the simplest way to deploy investment risk in a globally balanced way gives you a good reference for a counter- factual, and usually injects a dose of humility into any perfor- mance review as few strategies have strongly outperformed it over long periods.”
This highlights a good case for 60/40. Mikulskis also sums up the simpler virtues of the strategy. “It remains a useful bench- mark, though for the simplest way to deploy risk in a balanced portfolio and a reminder that simple approaches can be effective.”
And he adds, its essence is a realistic but successful approach. “In terms of an investment portfolio it can be easily improved upon, but it is actually a helpful benchmark to have in mind to hold fund managers and investment teams accountable and judge performance against.” So even if 60/40 is having a tough time, it serves a solid pur- pose for institutional investors. And though it may not take centre stage right now, like Arnie, it will be back.
Issue 116 | September 2022 | portfolio institutional | 19
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