PLANADVISER - January/February 2021 - 12

trends
The New '60/40' Portfolio?
Adjusting the composition of investments to meet new market realities
THE TRADITIONAL 60/40 portfolio allocation may no longer be
effective for meeting retirement plan and plan participant
needs, investment professionals have been suggesting. The
balanced portfolio is intended to provide returns to help
participants accumulate savings for retirement, while at
the same time mitigating equity
risk and preserving wealth, says
Susan Czochara, head of retirement
solutions, at Northern Trust
Asset Management (NTAM).
In State Street Global Advisors
insights report " Portfolio Construction
In and Out of the Core for the
Next Decade, " Matthew Bartolini,
head of SPDR [S&P Depository
Receipt] Americas Research,
says scrutinizing the portfolio is
warranted, " as recent returns have
not been as strong as they were in
prior decades. "
He says the new reality includes
expectations of lower returns going
forward. A lower return from the
60/40 portfolio means bonds would
be expected to provide a greater
return to make up for the loss, he
says, something he calls " unlikely. "
and market volatility is through the use of a quality lowvolatility
(QLV) portfolio. Low-volatility stocks are shares
of companies that tend to experience a narrower range of
returns versus the market as a whole, such as the Russell
1000 Index, a large-cap stock index, the report explains.
For DC plans, investment choices
4 Methods to Consider
According to the State Street Global
Advisors' report " Portfolio Construction
In and Out of the Core for the Next
Decade, " there are four key strategies
for building a more effective 60/40
portfolio. These methods also will likely
affect fees and taxes.
* Target active management
in areas where there is a strong
track record of above-benchmark
performance;
* Expand market coverage within the
MSCI All Country World Index (ACWI)
and Bloomberg Barclays Aggregate
Bond Index (Agg) to seek out underrepresented
areas or create a
different risk/return profile;
The Mix for DC Plans
The 60/40, or balanced, portfolio is
achieved differently by participants
in defined contribution (DC) retirement
plans than by institutional
investors such as defined benefit
(DB) plans, Czochara notes. While
some participants like to choose
their own investment mix, arguably
the majority of plan participants get
a balanced portfolio through targetdate
funds (TDFs) and white label funds.
With lower expected returns and increased volatility,
participants have two options for achieving their retirement
goals: saving more or taking on more risk in equities to try
to get higher returns, Czochara says. " It's been a challenge
to get them to save more, so we believe they'll take on more
risk, " she says.
According to an NTAM report, " Equity Designed With
Retirement in Mind, " by NTAM Retirement Solutions retirement
strategist Paul Kubasiak, taking on more risk in equities
is unattractive to retirement savers, especially those
nearing retirement. It suggests that one way to mitigate risk
* Structure portfolios based on
factors that have historically earned
a premium, while having patience
and trusting the process; and
* Increase exposure to noncorrelated
strategies to help navigate market
uncertainty and provide a more
differentiated return path than the
one just stocks and bonds would
provide.
available to participants who prefer
building their own portfolio should
be expanded to include private
credit and real assets, to permit
greater yield and protection from
inflation; globally diversified equity
choices should also be increased,
says Jamie Lewin, head of BNY
Mellon Investor Solutions.
For
plan
sponsors
using
a
balanced fund as their DC plan's
qualified default investment alternative
(QDIA), Lewin says, it is
important to preserve the cost effectiveness
of balanced funds, meaning
passive strategies are still important,
but " a bit more dynamism " can
be considered. " In the next decade,
those managing
balanced
portfolios
will take an active view of
selection for both equity and fixed
income, " he says. " Active selection
and choice, not necessarily active
investing, will separate the winners
from the losers and will help savers
continue to accumulate. "
Lewin says, as participants grow
older, particularly when there is
an increasing role of fixed income
to hedge against risk and protect
wealth, another variable is needed
in addition to age. " We think there
should be one more input: How has
the investor done? That is, has the participant accumulated
above or below what is expected to adequately meet his
needs in retirement? If the participant has under-accumulated
and is just adding fixed income because he's getting
closer to retirement age, that may compound the problem, "
Lewin says. " We're projecting 0% to 2% returns for fixed
income at best, so now may not be the best time to increase
the fixed-income allocation.
" The underlying market conditions that have prevailed
in the past 30 years have made the traditional 60/40 portfolio
an effective strategy, but we don't think it will continue
in the next decade, " Lewin says. -Rebecca Moore
12 | planadviser.com January-February 2021
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