What is a 60/40 strategy? And is it still relevant today?

The 60/40 approach has been a mainstay of investor portfolios, combining substantial equity holdings with a decent slug of fixed income. It worked particularly well in the aftermath of the financial crisis, when interest rates were falling and inflation was low, with the backdrop benefiting both asset classes. The strategy fell out of favour as returns from equities and bonds started to drop at the same time, but now there’s talk of a return. Both asset classes saw positive returns last year, which could revive its popularity.

Here we take a look at this investment style, outline the various pros and cons, and highlight funds to consider.

The pros and cons of 60/40 portfolios?

The 60/40 approach – which sees 60% invested in stocks and 40% in bonds – has long been seen as a sensible starting point for investors wanting a diversified portfolio. The equity proportion provides the longer-term growth potential, while the fixed income element gives it an element of security.

It worked well during the 2010s, where bonds and equities both benefited from low interest rates. However, the backdrop changed when the world’s major central banks started hiking interest rates to slow rapidly rising prices after Covid-19.

This has seen the returns from a combined bond and equity portfolio drop. Prior to the global financial crisis, it wasn’t unusual to see annualised returns of around 10%* from this type of portfolio, according to Chris Iggo, chair of the AXA IM Investment Institute. “In the last five years, the rolling return from a stylised 60/40 portfolio is between 0% and 6%* depending on whether it was invested in the euro, sterling, or US dollar markets,” he wrote.

A changing world

However, a return to more normal interest rates should set a solid foundation for long-term returns from bonds and shares, according to analysis by Vanguard.

“The case for a balanced portfolio (such as 60% in shares and 40% in bonds), is stronger than in recent memory, thanks largely to the improvement in the outlook for bonds,” it wrote.

However, investors favouring the 60/40 split may still want to add some alternative investments into the mix, according to a report from BlackRock. “Now may be the time to consider alternatives that can add diversification and target new sources of return,” it stated.

Funds for diversification

Here are our three choices for portfolios that blend bonds and equities to provide a diversified return.

Waverton Multi-Asset Income

Our first contender launched a decade ago and provides a multi-asset portfolio of direct equities, fixed income and alternative strategies. It currently has 50% in equities, 22% in bonds, 19% in alternatives, and 9% in cash**.

The investment philosophy and process of the fund, which is managed by James Mee and Matthew Parkinson, is focused on the management of risk. The team also has plenty of experience with alternatives, including exposure to real assets such as infrastructure and renewables, that offer returns linked to inflation.

James Mee joined us this week on the ‘Investing on the go’ podcast to give an update on the fund’s positioning and outlook for 2024. 

M&G Episode Income

Our next suggestion invests directly in individual stocks and bonds, while property exposure is gained by investment in funds. The portfolio’s aim is to generate a growing level of income over any three year period, while providing capital growth of 2-4%.

Its name, meanwhile, refers to periods of time (‘episodes’) when investors let their emotions get the better of them and act irrationally. The fund’s manager, Steven Andrew, looks for value created by these reactions. 

For example, Steven says he’s closely watching Chinese equities despite weak investor sentiment: “The recent intensification of this focus on downside price risk as the primary rationale of the China bears heightens the sense that the market is at or near extreme pessimism, which historically signals a good buying opportunity. Furthermore, price behaviour has been independent of other components of the portfolio so the asset class is also attractive from a diversification perspective,” he said. 

Jupiter Merlin Balanced Portfolio

The third fund on our list provides an even greater degree of diversification as the managers invest in funds, rather than individual securities. This portfolio, which is managed by the respected Jupiter Merlin team, can hold between 40% and 85% in equities. It’s currently around 81%** across global, UK, US and Japanese equities.

Co-manager David Lewis told us recently, that he viewed Japan as a compelling contrarian investment, with global asset allocators generally underweight the country: “Optimism around Japan is growing and 2023 saw the largest management buyout in Japanese history. Change in Japan has always been gradual but when markets realise that significant change is afoot, then the returns may come swiftly.”

The team seeks to take advantage of short-term market movements that create opportunities but can also take defensive measures when it feels they’re appropriate. We think the Jupiter Merlin Balanced fund is a great option for investors wanting growth and income, as both are achieved without too much compromise.

*Source: AXA Investment Managers, 20 October 2023

**Source: fund factsheet, 30 November 2023