The 60/40 portfolio, once a pillar of balanced risk-return investing, now faces scrutiny as inflation, rising rates, equity overvaluation, and fading stock-bond diversification challenge its core assumptions. While recent rebounds offer hope, evolving markets demand adaptation, with new potential asset splits emerging
The Context of the 60-40 Portfolio: Origins and Economic Conditions
The 60/40 portfolio ('60/40') is defined as a portfolio that consists of 60% public equities (ownership stakes in listed companies) and 40% publicly traded bonds (loans made to borrowers). The 60/40 portfolio represents the practical application of Harry Markowitz's Modern Portfolio Theory (MPT) as initially outlined in his 1952 doctoral dissertation. Markowitz stated that by designing portfolios in this way, investors could optimise by diversifying across asset classes with different risk/return characteristics, yielding a well-balanced overall portfolio risk and return. Balancing growth with downside protection. The 60/40 allocation became especially popular in the 1950s as it reflected the overall market split between publicly traded equities and fixed income instruments.
History Behind the 60/40
Markowitz's work laid the foundation for William Sharpe to develop his own theories, such as the Capital Asset Pricing Model (CAPM), establishing a formal relationship between systematic risk (beta) and expected returns. This helped investors attempting to diversify their portfolios to more efficiently balance higher-risk assets with lower-risk assets.
The core principles of the 60/40 allocation are simple, although they are backed up by some complicated financial theory and mathematics. It states that investors should diversify their holdings with a mix of higher-return, higher-risk assets (equities) and lower-risk, lower-return assets (bonds). This is because whilst a portfolio with significant bond allocation might generate lower absolute returns than an all-equity portfolio over very long periods, the diversification typically delivers less volatile performance, especially during times of crisis where bonds and stocks are disproportionately and sometimes negatively affected.
Historical Performance and Recent Challenges
Like every portfolio theory, if the 60/40 split did not generate attractive risk-adjusted returns, then few investors would have applied it, and the concept wouldn't have become regarded as a default option for many institutional and individual investors. According to CFA institute, since 1950, the 60/40 portfolio has delivered impressive annualized returns in real (inflation-adjusted) terms across major global markets: approximately 5% in the United States and Australia, more than 4% in the United Kingdom, approximately 3% for Japan and Europe, and around 4% as a global average. This growth is especially impressive considering the number of financial crises the 60/40 portfolio had to weather, such as Black Monday, Japan's asset price bubble, the dot-com bubble, the GFC, and most recently, COVID-19.
We can draw comparisons between the performance of the 60/40 and other, less diversified portfolios over the last decades. In most 25-year periods, the 60/40 split outperformed 100% equities, suffering less volatility along the way, and consistently outperformed 100% bond portfolios, which sometimes showed negative real returns, which is not viable for long-term growth.
In recent years the 60/40 portfolio has faced unprecedented challenges when, in 2022, rising inflation and rapid interest rate hikes caused both stocks and bonds to decline, with some even claiming that the end of the 60/40 allocation was near. 2023 brought higher interest rates, creating a more favourable environment for bonds, as government yields reached their highest level in 15 years. By holding bonds that year, according to LGT wealth management, investors could generate an annual income of around 5%.
The 60/40 portfolio ('60/40') is defined as a portfolio that consists of 60% public equities (ownership stakes in listed companies) and 40% publicly traded bonds (loans made to borrowers). The 60/40 portfolio represents the practical application of Harry Markowitz's Modern Portfolio Theory (MPT) as initially outlined in his 1952 doctoral dissertation. Markowitz stated that by designing portfolios in this way, investors could optimise by diversifying across asset classes with different risk/return characteristics, yielding a well-balanced overall portfolio risk and return. Balancing growth with downside protection. The 60/40 allocation became especially popular in the 1950s as it reflected the overall market split between publicly traded equities and fixed income instruments.
History Behind the 60/40
Markowitz's work laid the foundation for William Sharpe to develop his own theories, such as the Capital Asset Pricing Model (CAPM), establishing a formal relationship between systematic risk (beta) and expected returns. This helped investors attempting to diversify their portfolios to more efficiently balance higher-risk assets with lower-risk assets.
The core principles of the 60/40 allocation are simple, although they are backed up by some complicated financial theory and mathematics. It states that investors should diversify their holdings with a mix of higher-return, higher-risk assets (equities) and lower-risk, lower-return assets (bonds). This is because whilst a portfolio with significant bond allocation might generate lower absolute returns than an all-equity portfolio over very long periods, the diversification typically delivers less volatile performance, especially during times of crisis where bonds and stocks are disproportionately and sometimes negatively affected.
Historical Performance and Recent Challenges
Like every portfolio theory, if the 60/40 split did not generate attractive risk-adjusted returns, then few investors would have applied it, and the concept wouldn't have become regarded as a default option for many institutional and individual investors. According to CFA institute, since 1950, the 60/40 portfolio has delivered impressive annualized returns in real (inflation-adjusted) terms across major global markets: approximately 5% in the United States and Australia, more than 4% in the United Kingdom, approximately 3% for Japan and Europe, and around 4% as a global average. This growth is especially impressive considering the number of financial crises the 60/40 portfolio had to weather, such as Black Monday, Japan's asset price bubble, the dot-com bubble, the GFC, and most recently, COVID-19.
We can draw comparisons between the performance of the 60/40 and other, less diversified portfolios over the last decades. In most 25-year periods, the 60/40 split outperformed 100% equities, suffering less volatility along the way, and consistently outperformed 100% bond portfolios, which sometimes showed negative real returns, which is not viable for long-term growth.
In recent years the 60/40 portfolio has faced unprecedented challenges when, in 2022, rising inflation and rapid interest rate hikes caused both stocks and bonds to decline, with some even claiming that the end of the 60/40 allocation was near. 2023 brought higher interest rates, creating a more favourable environment for bonds, as government yields reached their highest level in 15 years. By holding bonds that year, according to LGT wealth management, investors could generate an annual income of around 5%.
Recent 60/40 Portfolio Performance in Europe
The 60/40 portfolio, composed of 60% equities and 40% fixed income, has long been a cornerstone of investing. This allocation has allowed investors to balance growth and stable returns, hedging equity downturns through fixed income appreciation. The fundamental logical basis of this allocation is the negative correlation that equity and fixed income have historically shown. However, 2022 tested the foundations upon which this theory was built, due to both equity and fixed income moving down in the same direction.
60/40 Portfolio Performance Europe (2022)
In 2022, European markets experienced one of their most volatile years in recent memory. According to data from FactSet, Euro Stoxx 50 declined by 12.4%, while the Bloomberg Euro Aggregate Bond Index — a proxy for high-quality euro-denominated debt — dropped nearly 19%. As a result, a classic 60/40 euro-area portfolio comprised of these two securities posted losses of approximately -15%, marking its worst performance since the European sovereign debt crisis.
This simultaneous decline exposed a structural vulnerability in the portfolio: the loss of negative correlation between stocks and bonds. Normally, European government bonds — particularly German Bunds and French OATs — serve as safe-haven assets during equity sell-offs. In 2022, however, inflationary pressures and aggressive policy tightening by the European Central Bank (ECB) drove bond yields higher across the continent, eroding capital gains and dragging down fixed income returns.
The 60/40 portfolio, composed of 60% equities and 40% fixed income, has long been a cornerstone of investing. This allocation has allowed investors to balance growth and stable returns, hedging equity downturns through fixed income appreciation. The fundamental logical basis of this allocation is the negative correlation that equity and fixed income have historically shown. However, 2022 tested the foundations upon which this theory was built, due to both equity and fixed income moving down in the same direction.
60/40 Portfolio Performance Europe (2022)
In 2022, European markets experienced one of their most volatile years in recent memory. According to data from FactSet, Euro Stoxx 50 declined by 12.4%, while the Bloomberg Euro Aggregate Bond Index — a proxy for high-quality euro-denominated debt — dropped nearly 19%. As a result, a classic 60/40 euro-area portfolio comprised of these two securities posted losses of approximately -15%, marking its worst performance since the European sovereign debt crisis.
This simultaneous decline exposed a structural vulnerability in the portfolio: the loss of negative correlation between stocks and bonds. Normally, European government bonds — particularly German Bunds and French OATs — serve as safe-haven assets during equity sell-offs. In 2022, however, inflationary pressures and aggressive policy tightening by the European Central Bank (ECB) drove bond yields higher across the continent, eroding capital gains and dragging down fixed income returns.
Euro Stoxx 50 and Bloomberg Euro Aggregate Performance (2015-2025)
Exhibit 1 (FactSet)
Inflation and Correlation
The highest inflation rate in 40 years, combined with the tightest labour market in 50 years, forced central banks around the world to issue the most aggressive rate-hiking cycle since Paul Volcker (USA 12th chairman of the Federal Reserve) in the 1980s. As a result of the circumstances, the negative correlation seen during the 2010s disappeared, leading to the low performance of the 60/40 portfolio. It is important to keep in mind that for 78% of years since the 1870s, the correlation between stocks and bonds has been positive, contrary to what recent data might suggest.
In the USA, when inflation exceeds 2.4%, the correlation tends to become positive, meaning that bonds no longer provide downside protection when equities fall. This has also been the case in Europe since mid-2021, as euro-area inflation surged due to supply chain disruptions, energy shocks from the war in Ukraine, and loose post-pandemic fiscal policy.
The highest inflation rate in 40 years, combined with the tightest labour market in 50 years, forced central banks around the world to issue the most aggressive rate-hiking cycle since Paul Volcker (USA 12th chairman of the Federal Reserve) in the 1980s. As a result of the circumstances, the negative correlation seen during the 2010s disappeared, leading to the low performance of the 60/40 portfolio. It is important to keep in mind that for 78% of years since the 1870s, the correlation between stocks and bonds has been positive, contrary to what recent data might suggest.
In the USA, when inflation exceeds 2.4%, the correlation tends to become positive, meaning that bonds no longer provide downside protection when equities fall. This has also been the case in Europe since mid-2021, as euro-area inflation surged due to supply chain disruptions, energy shocks from the war in Ukraine, and loose post-pandemic fiscal policy.
Inflation and Correlations in the E.U. (2010-2024)
Exhibit 2 (State Street)
60/40 Portfolio Performance Europe (2023 – 2024)
Despite the crisis in 2022, the more recent annual performance of the portfolio is much more optimistic. Over the past decade, a eurozone 60/40 portfolio compromised of Euro Stoxx 50 and the Bloomberg Euro Aggregate returned approximately 6.7% annualised, even when including the sharp losses of 2022. Between January 2023 and September 2024, the 60/40 portfolio rebounded strongly, gaining close to 28%, as European equities recovered and bond yields began to stabilise.
Furthermore, the volatility of the 60/40 portfolio specifically in the USA increased significantly — from a historical average of 7.5% to over 10% in 2022, according to Morgan Stanley.
According to Vanguard Europe, while one-year returns can fluctuate drastically, ranging from +35% to -25%, 10-year returns have remained relatively stable, reinforcing the long-term case for diversification across asset classes.
The disappointment of 2022 has led some European investors to question the relevance of the 60/40 model altogether. Yet Morgan Stanley and Amundi argue that this scepticism may be driven more by recency bias than by long-term fundamentals. The human tendency to overemphasise recent losses could result in suboptimal allocation decisions, particularly if inflation stabilises and bond-equity correlations return to historical norms.
The key question for European investors today is whether the 60/40 breakdown in 2022 was a cyclical deviation or a structural inflexion point. Much depends on future inflation expectations and the policy trajectory of the ECB. If inflation remains elevated or becomes more volatile, the positive correlation between stocks and bonds may persist, undermining traditional diversification.
Despite the crisis in 2022, the more recent annual performance of the portfolio is much more optimistic. Over the past decade, a eurozone 60/40 portfolio compromised of Euro Stoxx 50 and the Bloomberg Euro Aggregate returned approximately 6.7% annualised, even when including the sharp losses of 2022. Between January 2023 and September 2024, the 60/40 portfolio rebounded strongly, gaining close to 28%, as European equities recovered and bond yields began to stabilise.
Furthermore, the volatility of the 60/40 portfolio specifically in the USA increased significantly — from a historical average of 7.5% to over 10% in 2022, according to Morgan Stanley.
According to Vanguard Europe, while one-year returns can fluctuate drastically, ranging from +35% to -25%, 10-year returns have remained relatively stable, reinforcing the long-term case for diversification across asset classes.
The disappointment of 2022 has led some European investors to question the relevance of the 60/40 model altogether. Yet Morgan Stanley and Amundi argue that this scepticism may be driven more by recency bias than by long-term fundamentals. The human tendency to overemphasise recent losses could result in suboptimal allocation decisions, particularly if inflation stabilises and bond-equity correlations return to historical norms.
The key question for European investors today is whether the 60/40 breakdown in 2022 was a cyclical deviation or a structural inflexion point. Much depends on future inflation expectations and the policy trajectory of the ECB. If inflation remains elevated or becomes more volatile, the positive correlation between stocks and bonds may persist, undermining traditional diversification.
The Problem with the 60/40 portfolio
Global Public Market Valuations
Public equity valuations are high, pushed upwards by four consecutive years of strong annualised returns, pushing them close to historic highs. One way to analyse whether stocks are overvalued is to remove the effects of the short-term business cycle by looking at the 10-year average of earnings, which is expressed by the CAPE (Cyclically Adjusted Price-to-Earnings) Ratio. Historically, CAPE has averaged around 16-17. Today, it exceeds 38 – more than double the long-term average – a level previously observed only during extreme periods like the dot-com bubble and the post-COVID rally.
Historically, this has had serious implications for expected returns. In 2000, when the CAPE ratio hit 37.0, the following decade saw public equities underperform significantly. The S&P 500 returned just 1.7% annually over the next ten years, compared to private markets, which returned 8.6% annually. History suggests that when valuations peak, public equities struggle to deliver strong returns, particularly when compared to alternative asset classes. Supporting this, Vanguard estimates that US equities are currently trading approximately 30% above their fair value, indicating a heightened risk of correction to bring prices back to their fair value, or underwhelming returns to come as seen in the 2000s.
Global Public Market Valuations
Public equity valuations are high, pushed upwards by four consecutive years of strong annualised returns, pushing them close to historic highs. One way to analyse whether stocks are overvalued is to remove the effects of the short-term business cycle by looking at the 10-year average of earnings, which is expressed by the CAPE (Cyclically Adjusted Price-to-Earnings) Ratio. Historically, CAPE has averaged around 16-17. Today, it exceeds 38 – more than double the long-term average – a level previously observed only during extreme periods like the dot-com bubble and the post-COVID rally.
Historically, this has had serious implications for expected returns. In 2000, when the CAPE ratio hit 37.0, the following decade saw public equities underperform significantly. The S&P 500 returned just 1.7% annually over the next ten years, compared to private markets, which returned 8.6% annually. History suggests that when valuations peak, public equities struggle to deliver strong returns, particularly when compared to alternative asset classes. Supporting this, Vanguard estimates that US equities are currently trading approximately 30% above their fair value, indicating a heightened risk of correction to bring prices back to their fair value, or underwhelming returns to come as seen in the 2000s.
Cyclically adjusted Price/Earnings ratio in the U.S. (1950-2024)
Exhibit 3 (Vanguard)
U.S. vs E.U. 60/40 Portfolio Performance
In comparison to US equities, European equities, while not necessarily cheap, are closer to their fair value. European valuations have risen in recent months but are still below their historical peaks, with valuations now above the 50th percentile of their historical range, far below the 90th percentile levels seen in the US. This valuation gap presents an opportunity. By shifting some allocation towards European equities, investors can gain exposure to stocks that are not as overpriced as those in the US, which can help mitigate the risk of a valuation correction in US equities, while still offering growth potential in the European market.
This opportunity is already materialising: European equities have outperformed US equities in early 2025, and Goldman Sachs expects them to continue to rise by another 5-6% over the next 12 months. This growth is supported by Germany’s increase in infrastructure and defence spending, a historically rare move expected to boost domestic demand and earnings potential across the region. Additionally, Europe is less exposed to US tariff pressures, which have weighed more heavily on US equities. Europe’s economic outlook, while still uncertain, presents a more moderate risk profile compared to the US market.
However, European investors should be cautious about relying too heavily on domestic exposures. According to the Monash CFA Institute report, the European 60/40 portfolio has underperformed over the long term, delivering an average real return of 3.06% with a Sharpe ratio (a measure of risk-adjusted return) of just 0.15, compared to 4.89% and 0.32 in the US. This means the 60/40 portfolio has historically been less effective in Europe, both in terms of absolute return and risk efficiency. The Monash report further notes that when European investors diversified internationally, returns improved significantly: the Sharpe ratio rose from 0.15 to 0.27, and real returns rose to 4.33%, with lower volatility. This supports a key thesis: to remain viable in Europe, the 60/40 portfolio must evolve, for example by incorporating international exposure, private assets, or both.
Fixed income: Low Yields, High Risk
In fixed income markets, credit spreads are tight. Across the European market, both investment-grade bonds and high-yield bonds have narrowed credit spreads, so the difference in yield between these bonds and risk-free government bonds is smaller than usual. This suggests that investors are actively buying bonds, pushing up their prices and narrowing the yield gap. Despite this, performance in 2024 was strong: the ICE BofA Euro Corporate Index rose 5.1% year-to-date, and the Euro High Yield Index rose 7.9%.
In comparison to US equities, European equities, while not necessarily cheap, are closer to their fair value. European valuations have risen in recent months but are still below their historical peaks, with valuations now above the 50th percentile of their historical range, far below the 90th percentile levels seen in the US. This valuation gap presents an opportunity. By shifting some allocation towards European equities, investors can gain exposure to stocks that are not as overpriced as those in the US, which can help mitigate the risk of a valuation correction in US equities, while still offering growth potential in the European market.
This opportunity is already materialising: European equities have outperformed US equities in early 2025, and Goldman Sachs expects them to continue to rise by another 5-6% over the next 12 months. This growth is supported by Germany’s increase in infrastructure and defence spending, a historically rare move expected to boost domestic demand and earnings potential across the region. Additionally, Europe is less exposed to US tariff pressures, which have weighed more heavily on US equities. Europe’s economic outlook, while still uncertain, presents a more moderate risk profile compared to the US market.
However, European investors should be cautious about relying too heavily on domestic exposures. According to the Monash CFA Institute report, the European 60/40 portfolio has underperformed over the long term, delivering an average real return of 3.06% with a Sharpe ratio (a measure of risk-adjusted return) of just 0.15, compared to 4.89% and 0.32 in the US. This means the 60/40 portfolio has historically been less effective in Europe, both in terms of absolute return and risk efficiency. The Monash report further notes that when European investors diversified internationally, returns improved significantly: the Sharpe ratio rose from 0.15 to 0.27, and real returns rose to 4.33%, with lower volatility. This supports a key thesis: to remain viable in Europe, the 60/40 portfolio must evolve, for example by incorporating international exposure, private assets, or both.
Fixed income: Low Yields, High Risk
In fixed income markets, credit spreads are tight. Across the European market, both investment-grade bonds and high-yield bonds have narrowed credit spreads, so the difference in yield between these bonds and risk-free government bonds is smaller than usual. This suggests that investors are actively buying bonds, pushing up their prices and narrowing the yield gap. Despite this, performance in 2024 was strong: the ICE BofA Euro Corporate Index rose 5.1% year-to-date, and the Euro High Yield Index rose 7.9%.
European Investment Grade and High Yield Returns Year-to-Date (2024)
Exhibit 4 (ICE Index Platform)
This tightness presents a challenge because credit spreads already being right means there is little room for them to tighten further, so there is less potential for bond prices to increase higher (and yields to drop lower). Apollo argues that, given these tight spreads, public fixed-income investments do not offer great value anymore and investors are not likely to earn much additional return from them in the future, especially considering the broader risks in today’s market, including inflation staying sticky, rates staying high, geopolitical uncertainty, and more. Although European credit yields remain attractive from an income perspective, spreads are no longer ‘cheap’ in relative terms (especially in comparison to US credit markets where spreads are even tighter), so investors are not being compensated as generously for the risk they’re taking.
This is significant as the 40% bond allocation in the 60/40 portfolio is intended to provide stability, income and a hedge against equity volatility. But, in an environment of increased interest rates, bond prices fall, especially for longer-duration government and corporate bonds. Also, coupon payments may not compensate for the capital losses or loss of purchasing power caused by inflation. The historic negative correlation between bonds and equities – a pivotal characteristic of the 60/40 portfolio – is weakening.
The negative correlation between bonds and equities worked best during low-inflation periods, like in post-2008 QE years. Today, due to inflationary pressure, equities and bonds are moving together, undermining the key principle of the 60/40 portfolio: diversification. Additionally, inflationary pressures mean real returns on bonds are still low or negative, even as nominal yields rise. Investors are not being compensated adequately for duration or credit risk, especially with tight spreads and inflation uncertainty. This makes the “40” in 60/40 both less protective and less profitable.
Ultimately, the fixed income side of the 60/40 portfolio is facing structural headwinds. Without meaningful diversification or strong income returns, its ability to offset equity risk is diminished. This reinforces the broader case for rethinking traditional portfolio construction, particularly in EMEA markets where inflation risks, sovereign fiscal dynamics, and tighter spreads are adding further complexity.
Implications for the 60/40 Portfolio
The current macroeconomic climate exposes structural weaknesses in the 60/40 portfolio. Neither side – equities nor bonds – is delivering on its intended function. This raises the question on whether the model is now outdated or merely challenged in the short term: in other words, is this macroeconomic environment expected to continue in the long term?
Taking a historic view, over the past 150 years, stocks and bonds simultaneously experiencing negative returns in the same year occurred in only 16 instances, an 8% probability. This suggests that these breakdowns in diversification have been rare. However, some suggest that even if inflation eases slightly, the relationship between stocks and bonds has changed. According to Apollo, while equity-bond correlations may not remain at current elevated levels indefinitely, they are unlikely to return to the deeply negative values seen during the QE era since long-term inflation expectations have shifted higher.
The question this raises is whether this macroeconomic environment is expected to continue, threatening the long-term profitability of the portfolio’s structure, or if this macroeconomic environment is transitory, and inflationary pressures will ease in the future. While currently, and over the past five years, where there has been much geopolitical uncertainty, the 60/40 portfolio’s flaws have been exposed, it is less clear whether this means we should discard the model altogether.
This is significant as the 40% bond allocation in the 60/40 portfolio is intended to provide stability, income and a hedge against equity volatility. But, in an environment of increased interest rates, bond prices fall, especially for longer-duration government and corporate bonds. Also, coupon payments may not compensate for the capital losses or loss of purchasing power caused by inflation. The historic negative correlation between bonds and equities – a pivotal characteristic of the 60/40 portfolio – is weakening.
The negative correlation between bonds and equities worked best during low-inflation periods, like in post-2008 QE years. Today, due to inflationary pressure, equities and bonds are moving together, undermining the key principle of the 60/40 portfolio: diversification. Additionally, inflationary pressures mean real returns on bonds are still low or negative, even as nominal yields rise. Investors are not being compensated adequately for duration or credit risk, especially with tight spreads and inflation uncertainty. This makes the “40” in 60/40 both less protective and less profitable.
Ultimately, the fixed income side of the 60/40 portfolio is facing structural headwinds. Without meaningful diversification or strong income returns, its ability to offset equity risk is diminished. This reinforces the broader case for rethinking traditional portfolio construction, particularly in EMEA markets where inflation risks, sovereign fiscal dynamics, and tighter spreads are adding further complexity.
Implications for the 60/40 Portfolio
The current macroeconomic climate exposes structural weaknesses in the 60/40 portfolio. Neither side – equities nor bonds – is delivering on its intended function. This raises the question on whether the model is now outdated or merely challenged in the short term: in other words, is this macroeconomic environment expected to continue in the long term?
Taking a historic view, over the past 150 years, stocks and bonds simultaneously experiencing negative returns in the same year occurred in only 16 instances, an 8% probability. This suggests that these breakdowns in diversification have been rare. However, some suggest that even if inflation eases slightly, the relationship between stocks and bonds has changed. According to Apollo, while equity-bond correlations may not remain at current elevated levels indefinitely, they are unlikely to return to the deeply negative values seen during the QE era since long-term inflation expectations have shifted higher.
The question this raises is whether this macroeconomic environment is expected to continue, threatening the long-term profitability of the portfolio’s structure, or if this macroeconomic environment is transitory, and inflationary pressures will ease in the future. While currently, and over the past five years, where there has been much geopolitical uncertainty, the 60/40 portfolio’s flaws have been exposed, it is less clear whether this means we should discard the model altogether.
Alternatives to the 60/40 Portfolio
Looking aside from the 60/40 portfolio, there are several alternative strategies for asset allocation as investors try to get better risk-adjusted returns under new macroeconomic conditions. Through diversification of asset classes and geographies, these seek to reduce volatility without compromising returns.
Private Market Inclusion and the 50/30/20 Split
The addition of private markets to portfolios has the rationale of offering returns with a low correlation to public markets, reducing overall portfolio volatility. Additionally, with a relatively small allocation, investors may receive higher returns from a riskier asset class without the drawbacks of taking on large exposure, boosted by an illiquidity premium.
An emerging asset allocation split that harnesses this idea, proposed by firms such as Apollo and Blackrock, is the 50/30/20 model, opting for weights of 50% in equities, 30% in fixed income and 20% in alternatives such as private equity, private credit and real assets. This setup seeks to introduce alternatives as further uncorrelated sources of return to counteract the breakdown in the negative correlation between equities and bonds.
An illustrative structure, proposed by Apollo, for the 20% alternatives component was 50% private equity, 25% private credit and 25% real assets such as infrastructure, real estate and natural resources. With these assets facing different drivers to equities and bonds, their addition has the goal of making the overall portfolio more robust to economic conditions. Notably, real assets (and floating rate private credit loans) provide the benefit of inflation protection while gold has historically been a haven asset during volatile times.
Overall, this structure, and the inclusion of private markets, can be seen as fine tuning of the 60/40 portfolio that has the potential to provide better returns for lower risk without changing the core rationale of the split.
All-Weather Portfolio
As another option, the all-weather portfolio, initially proposed by Ray Dalio, provides a defensive allocation that is intended to perform across all economic conditions. Typically, this structure allocates 30% to equities, 40% to long-term bonds, 15% to intermediate bonds and 15% to commodities with a focus on gold. The intention behind this is to create a balanced exposure that generates returns while withstanding macroeconomic shifts. As in the 60/40, equities provide returns during periods of growth, while bonds fare better during recessions. The blended maturities provide further diversification while commodities and gold protect against inflation, and the latter hedges volatility.
Nevertheless, it should be acknowledged that this portfolio is far more defensive than the 60/40 and may underperform in bull markets. However, in periods of macroeconomic or geopolitical volatility, it is a suitable strategy for investors who prioritise capital preservation and a smoother return profile.
Multi-manager Hedge Funds
With the increasing competitiveness and popularity of public markets, multi-manager hedge funds have been a compelling alternative for high-net-worth investors. These funds combine an array of investment strategies under one umbrella to offer diversified exposure and generate uncorrelated returns that are typically boosted with leverage. They are broken up into individual teams with different strategies that can include long/short equity, credit, commodities, quantitative, macroeconomic and event-driven investing.
The main attraction to these platforms is their ability to generate returns across market cycles due to their diversification, strict risk limits and leverage. In contrast to single-manager funds, multi-managers significantly reduce net exposures and trading betas, and unlike large exposures to equities or bonds, these funds are not limited by adverse economic conditions such as high inflation or rising rates. This can be seen by average multi-manager hedge funds delivering a Sharpe ratio of 2.52 over the 10 years ended March 2024 as opposed to a HFRI fund-weighted composite index average of 0.58.
However, these funds have their downsides, being notoriously difficult to access. Direct access has a typical minimum investment requirement of about $10mn, while retail investors going through private bank feeder funds still have a hefty minimum investment requirement of about $100,000. Alongside this, fees match the typical 2% for management and 20% for performance. Finally, long lock-up periods are common, reaching 1-3 years for direct access. Nevertheless, the opportunity for relatively high uncorrelated returns across market cycles makes these vehicles an enticing alternative to a 60/40 allocation.
Conclusion
In conclusion, the recent crises facing the traditional 60/40 portfolio have led many managers to question whether the split can maximise performance and profit in a market of greater risk, tighter bond spreads and elevated equity valuations. Even as recent performances rebound, investors have begun to look into alternatives such as private markets, all-weather strategies and multi-manager funds, following the trend that diversification is a powerful tool in the long run. Rather than abandoning the 60/40 model entirely, investors should adapt it by incorporating broader asset classes and global exposures, enabling themselves to best navigate today's complex and volatile market environment.
Looking aside from the 60/40 portfolio, there are several alternative strategies for asset allocation as investors try to get better risk-adjusted returns under new macroeconomic conditions. Through diversification of asset classes and geographies, these seek to reduce volatility without compromising returns.
Private Market Inclusion and the 50/30/20 Split
The addition of private markets to portfolios has the rationale of offering returns with a low correlation to public markets, reducing overall portfolio volatility. Additionally, with a relatively small allocation, investors may receive higher returns from a riskier asset class without the drawbacks of taking on large exposure, boosted by an illiquidity premium.
An emerging asset allocation split that harnesses this idea, proposed by firms such as Apollo and Blackrock, is the 50/30/20 model, opting for weights of 50% in equities, 30% in fixed income and 20% in alternatives such as private equity, private credit and real assets. This setup seeks to introduce alternatives as further uncorrelated sources of return to counteract the breakdown in the negative correlation between equities and bonds.
An illustrative structure, proposed by Apollo, for the 20% alternatives component was 50% private equity, 25% private credit and 25% real assets such as infrastructure, real estate and natural resources. With these assets facing different drivers to equities and bonds, their addition has the goal of making the overall portfolio more robust to economic conditions. Notably, real assets (and floating rate private credit loans) provide the benefit of inflation protection while gold has historically been a haven asset during volatile times.
Overall, this structure, and the inclusion of private markets, can be seen as fine tuning of the 60/40 portfolio that has the potential to provide better returns for lower risk without changing the core rationale of the split.
All-Weather Portfolio
As another option, the all-weather portfolio, initially proposed by Ray Dalio, provides a defensive allocation that is intended to perform across all economic conditions. Typically, this structure allocates 30% to equities, 40% to long-term bonds, 15% to intermediate bonds and 15% to commodities with a focus on gold. The intention behind this is to create a balanced exposure that generates returns while withstanding macroeconomic shifts. As in the 60/40, equities provide returns during periods of growth, while bonds fare better during recessions. The blended maturities provide further diversification while commodities and gold protect against inflation, and the latter hedges volatility.
Nevertheless, it should be acknowledged that this portfolio is far more defensive than the 60/40 and may underperform in bull markets. However, in periods of macroeconomic or geopolitical volatility, it is a suitable strategy for investors who prioritise capital preservation and a smoother return profile.
Multi-manager Hedge Funds
With the increasing competitiveness and popularity of public markets, multi-manager hedge funds have been a compelling alternative for high-net-worth investors. These funds combine an array of investment strategies under one umbrella to offer diversified exposure and generate uncorrelated returns that are typically boosted with leverage. They are broken up into individual teams with different strategies that can include long/short equity, credit, commodities, quantitative, macroeconomic and event-driven investing.
The main attraction to these platforms is their ability to generate returns across market cycles due to their diversification, strict risk limits and leverage. In contrast to single-manager funds, multi-managers significantly reduce net exposures and trading betas, and unlike large exposures to equities or bonds, these funds are not limited by adverse economic conditions such as high inflation or rising rates. This can be seen by average multi-manager hedge funds delivering a Sharpe ratio of 2.52 over the 10 years ended March 2024 as opposed to a HFRI fund-weighted composite index average of 0.58.
However, these funds have their downsides, being notoriously difficult to access. Direct access has a typical minimum investment requirement of about $10mn, while retail investors going through private bank feeder funds still have a hefty minimum investment requirement of about $100,000. Alongside this, fees match the typical 2% for management and 20% for performance. Finally, long lock-up periods are common, reaching 1-3 years for direct access. Nevertheless, the opportunity for relatively high uncorrelated returns across market cycles makes these vehicles an enticing alternative to a 60/40 allocation.
Conclusion
In conclusion, the recent crises facing the traditional 60/40 portfolio have led many managers to question whether the split can maximise performance and profit in a market of greater risk, tighter bond spreads and elevated equity valuations. Even as recent performances rebound, investors have begun to look into alternatives such as private markets, all-weather strategies and multi-manager funds, following the trend that diversification is a powerful tool in the long run. Rather than abandoning the 60/40 model entirely, investors should adapt it by incorporating broader asset classes and global exposures, enabling themselves to best navigate today's complex and volatile market environment.
Written by: Alex Murray-Bruce, Ettore Marku, Neil Pinto, and Ilse Katelyn Russell-Jones
Bibliography:
- Amundi
- Apollo
- Bank of America
- BlackRock
- CFA Institute
- ECB
- EQT
- FactSet
- Financial Times
- Goldman Sachs
- ICE Index Platform
- JP Morgan
- Morgan Stanley
- Vanguard