Challenges of the 60:40 portfolio approach

Recent market drawdowns have again highlighted that balanced superannuation portfolios are not impervious to market volatility.

After an exceptionally strong performance period over the previous 12 months, many balanced funds delivered negative returns for the year ending 30 June. According to Super Ratings, the median loss across balanced funds was 3.1 per cent, with some much worse. 

This has again raised questions and debate around the merits of the traditional 60:40 portfolio approach, where 60 per cent of the portfolio is allocated to growth assets and 40 per cent to defensive, and how this may restrict portfolios during market downturns. In response, we have seen a natural defence of this approach from mainstream index funds given they are proponents of the ‘set and forget’ portfolio.

However, while many investors are somewhat used to volatility in shares, volatility in bonds is a new concept, last seen to any great degree in the bond crash of 1994. Over the year to 30 June 2022, the Australian bond index (measured by the Bloomberg AusBond Composite Bond Index - All Maturities [TR]) fell -10.5 per cent, the largest yearly fall since the index started in 1989. This has translated to ‘conservative’ portfolios sitting on negative returns between -3 per cent and -10 per cent over a one-year period leaving investors, such as pensioners, who are exceptionally vulnerable to falls in their account balance facing outsized negative return in their account balance. 


The argument that clients should ‘sit-out the storm’ is appropriate for those in their 30s, 40s and even 50s. However, as an individual leaves the workforce, protecting capital, having consistent results, and generating income become the foremost objectives. 

Bringing investment under a dual mandate of risk and performance

Part of the reason why these events aren’t better managed is that the advice and superannuation industry works off very simple frameworks of growth versus defensive asset allocation. Risk can be defined as the portion of growth assets in the portfolio, which is largely made up of shares. Portfolios are constructed at various levels of growth assets (from more conservative to aggressive), and the return and risk expectations for investors are then based on the market forecasts for each of those portfolios. The allocation to growth assets is largely fixed at each risk profile, and to achieve a change in asset allocation, it is up to investors to move between options based on their risk tolerance, need to achieve returns and overall risk profile.

However, it is generally up to the licensee (or APL provider) to determine what assets are growth and what is defensive. This is complicated by the selection of assets that funds can invest in, ranging from listed or direct infrastructure, property, private equity, commodities and hedge funds. A few years back, AustralianSuper’s balanced option was reclassified by the major research houses as ‘growth’, because of its exposure to assets such as property, private equity or infrastructure (closer to 80 per cent). Many still refer to this product as balanced as this is how it is labelled, but this may be an incorrect assumption and muddy comparisons between alternatives. 

Seeking true diversification 

When market volatility rises in a downturn, correlation between assets also tends to rise; many assets fall in lockstep when volatility rises. With interest rates at all-time lows, the traditional role of bonds as a safe haven is also challenged — especially in an environment of elevated inflation. 

Some funds have done a better job in this environment, simply because they seek true rather than naive diversification. Real return or objective-based funds have been around for some time and saw their emergence in the UK in the early 2010s on the back of the poor returns delivered by traditional assets. In Australia, a number of these funds have been established by mainstream managers in a bid to provide a point of difference to the traditional balanced fund that’s attracted inflows to index and industry funds. 

The key difference between a real return or objective-based funds and a traditional fund is that the former starts with the portfolio objective, such as to deliver a return above the cash rate or to manage risk to a certain level. The portfolio is then constructed that maximises the probability of meeting this objective. By focusing on clear objectives, investors are offered a clearer understanding of what the portfolio is trying to achieve and can choose the right portfolios that are aligned with their own personal objectives. This differs to the traditional fund where the portfolio is first set to a growth/defensive limit, and the return and risk expectations are then the outcome of the process.  

As the limitations of the 60:40 portfolio are demonstrated, the industry has the potential to reshape the discussion with clients around appropriate levels of risk, rather than the traditional buckets of growth and defensive.

David Dix, head of investment solutions, Atrium

Challenges of the 60:40 portfolio approach
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Neil Griffiths

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.

Neil is also the host of the ifa show podcast.

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