One of the most successful approaches to diversification might be due for a thorough revision.
The 60-40 portfolio mix is considered the simplest strategy for investors who want diversified streams of income and involves placing 60% in equities and 40% in fixed income.
This rationing helps an investor balance the risk-taking they need to reap the stock market’s higher returns with the safety net that is necessary when there’s volatility.
It is an asset mix that has worked superbly over time and during the past 10-plus years of the bull market in US equities. All an investor really needed was a mix of large-cap stocks and Treasuries, and it was all smooth sailing. Any significant deviation from this could have been costly.
But this simple approach may no longer be adequate going forward.
“We think that diversification away from that would be helpful,” said Erik Knutzen, the chief investment officer of the multi-asset-class team at Neuberger Berman, a $333 billion manager.
“There are other drivers of growth around the world and other drivers of returns that can be uncorrelated with US stocks and bonds,” he told Business Insider during a recent phone interview.
It is important to start finding these drivers as the US business cycle winds down and the returns that investors have enjoyed during the good times become more challenging to come by.
“One of the key themes that we’re exploring with clients right now is investing in strategies that will be less tied to the US or developed-market business cycles,” Knutzen said.
As this year has progressed, he found reason to turn more cautious — but not bearish — on US-linked assets.
After the ghastly sell-off in the fourth quarter of 2018, Knutzen tilted the firm’s multi-asset portfolios overweight in a broad-based manner, from US large- and small-cap stocks to credit. He reaped the rewards of this view during the first quarter as markets rebounded.
But given the lower level of interest rates and bond yields, he no longer finds valuations as attractive as they looked a couple of months ago. And that has prompted an adjustment to a more neutral position in his asset allocation, he said.
Going forward, he’s hunting for drivers of growth around the world and other sources of returns that do not move in lockstep with US stocks and bonds. The first step for investors, he said, is to incorporate exposure to non-US stocks. These include emerging-market stocks that are benefiting from their own business cycles and growth drivers.
Investors should also consider exposure to themes that are less sensitive to the US economic cycle or that are still maturing, such as autonomous driving and 5G technology.
On the fixed-income side of things, Knutzen recommended that investors consider diversifying into Treasury inflation-protected securities, which could provide a ballast if inflation spirals higher.