The 60/40 portfolio which has underpinned many investment portfolios of clients in regent decades “should be dead", according to John Roe, head of multi-asset investing at Legal and General Investment Management (LGIM).
Roe believes the premise upon which the 60/40 portfolio model is based - that bonds and equities are inversely correlated - “was shown to be a false one in the 70s and 80s".
He told FTAdviser: "The idea is that if a real recession happens, then equities fall in value but bonds rise in value because the expectation is that inflation would be falling.
"But the reality is that in the 70s and the 80s, when we had a recession but inflation was also quite high, that inverse correlation didn’t always happen.”
He added that with the need to own alternatives and emerging market debt and property investment trusts, the idea of the 60/40 portfolio "should be dead".
"We don’t just assume that we know about the path of inflation, and I am sceptical anyone really does," Roe said.
"Of course there are times when the 60/40 approach does work, but I think that is more about luck than anything else.”
Roe is head of the multi-asset team at LGIM, where has oversight of both the multi-index range and the model portfolio service.
Day to-day management of both is covered by Andrzej Pioch and Francis Chua. Pioch and Chua were part of the team that managed the funds under Justin Onuekwusi, the firm’s former head of retail.
Since Onuekwusi’s exit, the head of retail title has not been replaced, with the responsibilities attached to that role split between Roe and the fund managers.
Growing the model portfolio service is one of the priorities of the new team, said Roe.
Roe told FTAdviser: “We are adding more resources into the team generally since Justin exited. It isn’t a case of using the budgets we have in a one for one kind of way.
"We certainly view the model portfolio range as a growth area. We would like to see a more balanced level of AUM growth between the model portfolio range and the passive index range.
"Some of that growth will come from the ESG model portfolios, we are starting to see a greater level of client engagement there.”
He says many investors were “surprised” by the poor performance of ESG stocks in 2022, as they realised that investments in that part of the market leaves one overexposed to growth and tech equities.
Roe said LGIM’s approach is to start off with the index, which does have those biases, but then “tilt” the portfolios a little in order to not be over-exposed to any particular factor.
david.thorpe@ft.com
