What should replace the 60/40 split?

At our upcoming WP Advisor Connect event we'll ask if the strategy is truly dead, and what sort of asset allocation can replace it?

What should replace the 60/40 split?

It’s over. The 60/40 split of equities to fixed income, the watchword of retail investors for decades, is running out of road. It’s not as useful as it once was and it’s looking like the time to chuck it out on the strategic scrapheap.

That may be an overstatement, but it reflects a view increasingly held across the investment industry. It’s a view driven by the democratization of alternative assets like real estate and private equity as a literal alternative to low-yielding fixed income and risky equities. But what should replace the 60/40 split? Pension plans are often touted for their 40/30/30 approach but the price and illiquidity of alts make such a high allocation unattractive to retail investors. At the upcoming WP Advisor Connect event, panel discussions will drill down on the question: what should replace the 60/40 split?

“Our panel will cover rethinking 60/40 in portfolios and how to make alternatives fit,” says Claire Van Wyk-Allan, director and head of Canada at the Alternative Investment Management Association (AIMA) and one of our panel speakers at the event. “As a spoiler, I know that 60/30/10 has been a growing theme in Canada… A 10 per cent alts allocation can help people looking for a diversifier as well as a risk reducer.”

Van Wyk-Allan says, of course, that asset allocation can be seen in a number of ways and should always be informed by the KYC/KYP process. While AIMA doesn’t involve itself in hard asset allocation recommendations, she says they examine alts strategies as substitutes and diversifiers for both the equity and fixed income sides of the portfolio, as well as perhaps as a macro overlay. Multi-strategy alternative funds can also be a balanced way of getting exposure to a variety of hedge fund strategies.

She says, too, that the list of options for these portfolios is growing rapidly through offering memoranda, alternative mutual funds, and a growing suite of alternative ETFs. With that growing suite comes greater access to management talent, once concentrated in hedge funds. Now retail investors can choose from a variety of philosophies and strategies espoused by managers with strong track records of performance.

Those same retail investors, especially those of a younger generation, are looking for ESG integration in their portfolios. Alternatives can offer a means, Van Wyk-Allan says, to invest with sustainability in mind. Access to alts strategies with short selling means that ESG-minded investors can keep companies honest, as we saw in the Wirecard scandal. 

With a growing menu of alts options, that 10 per cent, or whatever level of asset allocation your client is comfortable with, can fill up fast. It’s important that advisors get a full lay of the land in the alts space and communicate them effectively to their clients. Van Wyk-Allan says that at the WP advisor connect event on September 24th, advisors have an opportunity to educate themselves so they can educate their clients and make sure the new portfolios post-60/40 can consistently outperform.

“I think it's important that advisors prepare retail investor portfolios for future volatility,” Van Wyk-Allan says. “They can do that by keeping alternative investments as an evergreen portion of their portfolio.”

To hear more from Claire Van Wyk-Allan and other thought leaders in the alternatives space, register for WP advisor connect today.