Is the 60/40 portfolio dead?

2022 was a sobering year for those who had supported the 60/40 approach - a balanced portfolio that places 60% of its assets in stocks and 40% in bonds.

Morningstar's 2023 Diversification Landscape report investigates how a continued period of higher inflation might affect the link between stocks and bonds. It concludes that if inflation remains above average for an extended period, Treasuries and other high-quality bonds might be less reliable diversifiers.

So, do investors need to look beyond stocks and bonds?

Morningstar's Annika Bradley asked AustralianSuper chief investment officer Mark Delaney at the 2023 Morningstar Investment Conference in Sydney.

Transcript: 

Annika Bradley: So let's start with the portfolio and this notion that the 60-40 portfolio is dead. So that is investors need to look beyond stocks and bonds. BlackRock are calling for an increased allocation to alternatives. Vanguard are unsurprisingly staying the course at this point. Mark, from your perspective, is the 60-40 portfolio dead. Do investors need to look beyond that portfolio?

Mark Delaney: Hi everybody, thank you for having me. It's good to see everybody here and those online. I don't think it's really dead. We've done some work on this and the argument really is that high inflation or higher inflation is going to make it harder for bonds to work and more difficult for stocks, and there's a degree of truth in that. More than likely higher inflation if it manifests itself over the medium term will result in lower returns in all the investment classes. And the absolute total return comes down, but the relative ranking of asset class returns probably won't change that much, i.e. on a 10-year view stocks will beat bonds, you know, bonds will do better than cash, et cetera. It's just instead of getting like AustralianSuper's balanced plans done, I think 8 in the quarter over the last 20 years, you won't be getting 8 in the quarter you'll be getting 6.5.

Bradley: And what about alternatives and private markets, do you see that as a core part of evolving portfolio?

Delaney: That's really the endowment model, I mean endowments were the first ones to adopt this, and then the Canadian pension plans went there. And the Australian, particularly the industry funds, were very early adopters of infrastructure and some extent private equity. There's a big role for private assets in portfolios, if they can be well executed. They have much more operational leverage than in a public market. And you can get some businesses which have a much greater growth potential. So the combination of both allows you to get much better returns. They're no longer as cheap as what they used to be. So you used to be able to buy private businesses at a discount to publics, you can't do that any longer, but the leverage aspect, operational leverage, particularly in private equity is really substantial. And if you think back to the airports they were, pre-COVID probably the best returning investment over 25 years. But when they were privatised, they were just sold on landing revenue. They weren't sold on any revenue from the car parks, from the shops and whatever. So with all these private businesses, it's not so much what the revenue is today, but what the revenue can be in the future, so it does require active management, but I think they're a core part of your portfolio if you can do it well.