The Struggles of a 60/40 Portfolio for Pensions and Individual Investors

bee

It is always my hope to seek out fund managers who are seasoned at these dynamics managing risk/reward (tail risk, interest rate risk, equity risk, etc.).

Who are your favorite fund managers and what are your favorite managed funds when it come to portfolio risks?

Despite the longest economic expansion in U.S. history, the gap between the present value of liabilities and assets at U.S. state pensions is measured in trillions of dollars. To make matters worse, pensions are now faced with the reality that standard diversification — including extremely low-yielding bonds — may no longer serve as an effective hedge for equity risk.

While I was at CalPERS, concerns arose in 2016 about the effectiveness of standard portfolio diversification as prescribed by Modern Portfolio Theory. We began to recognize that management of portfolio risk and equity tail risk, in particular, was the key driver of long-term compound returns. Subsequently, we began to explore alternatives to standard diversification, including tail-risk hedging. At present, the need to rethink basic portfolio construction and risk mitigation is even greater — as rising hope in Modern Monetary Theory to support financial markets is possibly misplaced.

At the most recent peak in the U.S. equity market in February 2020, the average funded ratio for state pension funds was only 72 percent (ranging from 33 percent to 108 percent). That status undoubtedly has worsened with the recent turmoil in financial markets due to the global pandemic. How much further will it decline and to what extent pension contributions must be raised — at the worst possible time — remains to be seen if the economy is thrown into a prolonged recession.

Article:
Investors-Are-Clinging-to-an-Outdated-Strategy-At-the-Worst-Possible-Time

Sven

For domestic stock funds: David Giroux of PRWCX. Don't have one for international funds due to lack of consistency.

BTW, CalPERS has not been effective in managing their retirement fund for a number of years comparing to David Swanson of Yale University. Swanson uses sizable private equities and alternative strategies in additional the broader index funds. Other institutions including Harvard tried to replicate Yale's approach but none was nearly as successful.

Old_Skeet

For me, the 60/40 is not dead. Since I retired a little over five years ago instead of being 60% in stocks and 40% in bonds and cash ... I'm 60% bonds and cash and 40% in stocks in what I call my all weather asset allocation which is also configured to generate a good income stream.

davfor

My portfolio is similar to a traditional 60/40 portfolio at about 55/35/10 (short term & other). No plans to change course anytime soon. Four funds somewhat fit the traditional 60/40 mould: BTBFX, JABAX, RPGAX, and VLAAX (Fido will not let me into PRWCX ).

Sven

Buckets or sleeves approach also work as it allow allocation flexibility to meet both short and long term needs. One can add some exposure to precious metals/miners and alternative strategies. David Snowball presented a T. Rowe Price fund in a recent Commentary.

zenbrew

PRWCX Semi-Annual Report

David Giroux's reports are typically insightful:

Bullish on GE & utilities (added to both during downturn). Lightened up some in healthcare. Bearish on treasuries (eliminated from fixed income sleeve). Added leveraged loans (but holdings in report show only bank loans- so I'm not sure if these are same- Morningstar shows no bank loans for PRWCX- but 40% unknown).

Currently at: Equities 65%; Fixed Income (half corporate bonds & half leveraged loans (?bank loans) 21%; Cash 11%; the other 3% ? convertible stocks.

I'm not sure that he'll always be correct but I am very comfortable with his thought process.

Rbrt

Here’s the pieces conclusion:

Direct tail-risk hedging using equity put options has proven a successful approach. Tail-risk hedging provides protection against extreme market moves that have occurred historically at a frequency well beyond what is predicted by a normal return distribution.

Properly managed options-based tail-risk hedging can raise the CAGR where bonds have failed. Over time this can improve funded ratios, regardless of interim market crashes. Standard risk mitigation through diversification in the pursuit of higher Sharpe ratio has almost uniformly lowered the CAGR of a typical pension over a full market cycle.”

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To answer your question, with few exceptions, every active fund I’ve invested in has disappointed me eventually. My largest active managed stake is in Fidelity Puritan.