Asset allocation and the evolution of the 60/40 portfolio

Revolution is unlikely to come anytime soon for the 60/40 portfolio, which is a traditional combination of 60% allocated to stocks and 40% to bonds. Its death has been foretold many times in the past, yet it has remained an important and enduring tool in an asset allocator’s kit.

And while it will likely remain a viable strategy for many investors, a challenger is emerging – one which uses a more evolved strategy that will likely be better adapted to meet the challenges posed by the investment landscape today, and potentially over the coming years.

• High equity valuations, particularly in the US market, suggest lower future returns for stocks over the next 5-10 years^1,2. Goldman Sachs, for example, estimates that the S&P 500 index will deliver an annualised nominal total return of 3% during the next 10 years, far lower than the 13% it generated over the previous decade³ (7th percentile since 1930) and roughly 1% on a real basis. This could weigh on the overall performance of a 60/40 portfolio.
• Many investors are no longer as convinced by the long-term stability of the historically negative correlation between bonds and equities, especially since the supply chain shocks of 2022. The hedging value of bonds within portfolios may diminish, therefore challenging traditional investment strategies such as the 60/40 asset allocation model^1,2.
• With traditional bond-equity correlations in question, interest in alternative sources of diversification have increased significantly at the same time that access to private markets is opening up.

Financial advisers certainly see clear benefits to adding private assets to client portfolios. According to our survey⁴, almost half (49%) say private assets are more attractive given high correlations in public markets, while 56% say private assets have improved outcomes for clients.

Given increased investor demand, 56% also plan to increase the use of private assets in the next five years⁴. That said, more investor education is needed: 72% say that clients do not understand the holding period that comes with private investment⁴. Nevertheless, in a changing environment, one could argue that the days of the traditional 60/40 portfolio might be numbered after all.

Commenting on the potential of private assets, Eric Deram, Managing Partner at private equity specialist Flexstone Partners, said: “For me, the narrative over the next ten years continues to be that entrepreneurship is a winning system for ensuring wealth creation for the world population. Private capital has demonstrated time and time again that it is vital for innovation. And while AUM in private assets still represents less than 10% of all investable assets, and private equity specifically remains a fraction compared to listed equities, more than 80% of companies globally are held in private hands and need financing through private equity⁵. As a result, the financing of private entrepreneurship will continue to be vital for economic development and innovation.”