Speaking in Sydney on Thursday, Perennial Value portfolio manager Dan Bosscher threw into question the traditional 60/40 portfolio model as an effective way of hedging against risk.
“60/40 as a diversification strategy may not necessarily always be a hedge that works for you,” Mr Bosscher said.
He pointed to figures from the last 100 years that demonstrated a number of instances where 60/40 portfolios had suffered drawdowns of 20 per cent or more.
Mr Bosscher also added that readjusting the ratio to increase bond allocations would not necessarily provide the protection fund managers or investors wanted, because “90-odd per cent of the risk” in such a portfolio was coming from stocks.
“So when you’re looking at a balanced portfolio and you want to de-risk even further, for example, and you increase the bond allocation to do that, the actual impact on the risk reduction that you’ve now tried to input into the portfolio is a lot less than you might otherwise think.
“It’s important to remember that while 60/40 is a fair start to approaching the concept of risk management, it needs to be understood that the stock component is really generating a lot of risk.”
He also added that the concept of the 60/40 portfolio hinged upon the expectation that equities and bonds would remain negatively correlated – but that this was subject to change.
“You can see that over a very long period of time, that correlations themselves are not static,” he said. “What you can see on that chart is that they vary through time.”
“It’s only really been in the last 20-odd years you can see on that chart, that bond/equity correlations have been negative.
“So when you’re constructing a portfolio to try [to] diversify away from risk, you really need to have correlations that are offsetting each other,” he said.
“And when you are relying on a historical time series that looks like that to generate that diversification risk management, then you really are relying on those correlations working in your favour.
