Is the traditional 60/40 split dead?
The 60/40 portfolio traditionally consists of 60% equities and 40% bonds and remains a popular allocation strategy for investors. It aims to balance higher-growth equities and lower-risk bonds, offering some protection during market downturns. Recent declines in equities and bonds in a synchronised way, challenge the effectiveness of this allocation because portfolio models – like the 60/40 allocation – assume that asset classes remain uncorrelated.
However, due to prevalent non-stationarity in markets and an absence of diversification, such elementary allocations have consistently underperformed through economic cycles going back to the 1960s. Pension consultants have mainly been responsible for popularizing the 60/40 solution as an investment panacea through questionable incentivization practices, thereby exacerbating the pension hole.
Understanding risk tolerance and diversifying investments across all asset classes (which may be non-traditional) is essential to better manage uncertainties and market volatility. Robust risk management is realized by adding uncorrelated constituents to a portfolio, such as liquid alternatives, commodities, and forex.
A further rich source of valuable de-correlation comes from systematic strategies (commonly grouped as hedge funds). As an example, a pure fixed-income portfolio may not appear diverse. But de-correlation using a suite of unrelated strategies can significantly enhance robustness.
In summary, many sources of diversification are available to the investor, allowing a portfolio to function as a well-oiled machine, capable of delivering consistent returns while controlling risks tightly.
The rigorous construction of investment portfolios has been crucial for managing risk and ensuring long-term sustainability since Markowitz’s seminal work in 1952. Mean-variance analysis has become a popular framework for portfolio allocation, used by various investors, including university endowments and robot advisors.
However, like any model, mean-variance analysis relies on simplifying assumptions that enhance and limit its usefulness. Viking Harbour leverages the C8 platform, which offers a range of alternative portfolio construction techniques that go beyond Markowitz, and incorporate the lessons learnt over the past decades.
As a technology supplier, C8 provides construction tools for building robust portfolios with desirable constituent indices and strategies, offering various modern, robust solutions catering to different investment requirements. Their flagship, C8-Studio, incorporates practical constraints into portfolio problems accounting for drawdown, turnover, sparsity, sectorial, and tracking error, to ensure real-world applicability. Using advanced numerical methods in robust statistics and optimization, users can create realistic and bespoke solutions that meet their unique needs. It also provides direct access to a comprehensive suite of tradeable indices, allowing investors to build institutional-grade portfolios. The indices cover a diverse range of equity, bond and alternative systematic and algorithmic ideas whose IP is packaged for immediate use as provided, or for incorporation into bespoke portfolio allocations.
Traditionally, registered investment advisors have not used liquid alternatives, favouring investment solutions with equity and bond ETFs. The need for sophisticated portfolio construction tools has limited their ability to present genuinely bespoke offerings. Our access to technology and the C8 marketplace allows us to deliver differentiated products with clear performance/risk advantages, providing advisors with the knowledge and skills they need to serve their clients better and increase profitability.
