Is the 60/40 portfolio dead? That seems to be the big question for advisors navigating markets for their clients nearing or in retirement over the past few years. Modern Portfolio Theory asserts that a precise mix of stocks, bonds, alternative assets, and cash should be molded to form an allocation that maximizes return for a given level of risk. Unfortunately, correlations among asset classes are always in flux – there is no static ideal investment set. 

Of course, we shouldn’t toss all of Harry Markowitz’s claims to the curb. Indeed, it is a dangerous and potentially costly game to stray too far from traditional asset arenas in search of a low-risk, high-return portfolio; certain core themes endure no matter what’s happening at the macro level. While the 60/40 portfolio faces challenges – namely due to a positive price relationship between stocks and Treasuries today – advisors should not ditch the basics. 

The 60/40 Faces Challenges

Source: RBC Capital Markets

The S&P Market Agility 10 Index: What Is It & Why Now?

The S&P Market Agility 10 Index (the “Index”) offers a modern spin on Markowitz’s age-old maxims. Instead of depending on a passive approach to the 60/40 mix, it’s now possible to be active. “Active” is sometimes a dirty word in the investment management world; some might say it is a euphemism for expensive. This is not your father’s “active,” though. Active can also mean quantitative and mechanical, without the emotionally susceptible and potentially biased touch of active portfolio managers. 

Recent years have demonstrated that rules-based allocations, particularly momentum strategies, can work in today’s fast-changing markets. Moreover, technology and innovation have improved so that forming such a portfolio, and allowing it to manage itself, is not a very costly endeavor. 

Introducing the S&P Market Agility 10 Index

Source: RBC Capital Markets

Stocks & Bonds Move Differently Today (But We’ve Seen This Before)

The S&P Market Agility 10 Index was built and is quantitatively managed on the premise that recent market trends have severely challenged the status of the 60/40 portfolio. It, along with products based on it, seeks to help investors meet their goals in this new regime of higher stock-bond correlations, elevated inflation, and the potential for higher long-term interest rates. 

The 60/40 works wonders when Treasuries move in the opposite direction of the S&P 500; the period from the Great Financial Crisis through the onset of the COVID pandemic was such an instance. Likewise, there was a stretch from the Great Depression through the 1950s when stocks and Treasuries were negatively correlated. The 1970s was an example of how devastating inflation can be for those passively invested in stocks and bonds when rising interest rates not only hurt equities, but also slammed Treasury returns.

Hence, broad asset classes tend to move in cycles. We may be just beginning an inflationary regime which, according to intermarket theory, asserts that stocks and bonds could move together (e.g., the S&P 500 and interest rates could have an inverse relationship). The S&P Market Agility 10 Index embraces the reality that spikes in interest rates could increase stock market volatility. It can go long and short while shifting its net exposure to the S&P 500 and the Treasury curve. Furthermore, while many products today are slow to respond to macro market movements, the Index has a fast response. Being quick to shift is key today since corrections and even bear markets seem to begin and end faster than ever.

How the Index Works: Fast Responses, Long & Short, Targeted Volatility

Getting into some of the details, the Index can have long or short exposure to the S&P 500 and parts of the Treasury market. When volatility in stocks jumps and momentum begins to sink, the stock portion of the Index may flip from long to short. For the fixed-income piece, some of the same principles apply, but there is also the variable of what’s happening between the 2-year and 10-year Treasury notes. 

Overall, the Index has a 10% volatility target, which, for context, is roughly half of the S&P 500’s historical volatility. The equity component is set at a 70% exposure target, and the bond piece is set at a 30% exposure. The Index adapts to fast-changing markets in its objective of creating more stable long-term returns than the traditional 60/40 allocation. 

Designed for Risk-Conscious Investors

The reality is that an agile solution is required to help risk-sensitive investors not only reach retirement, but also enjoy their golden years without anxiety about meeting their daily expenses. A smoother investment ride can deliver better peace of mind and even offer protection from the lingering threat of inflation. Originated by RBC and independently administered by S&P Global, the Index employs “effective” diversification techniques, a flexible allocation, and predictable risk levels to meet such investor demands. 

Analyzing the Data

Advisors love numbers, so let’s peek into historical simulated returns of the Index. We find that its performance was not a whole lot different from the traditional 60/40 allocation back when the S&P 500 and Treasuries were negatively correlated. When that relationship flipped (and it did so quickly), the Index began to sharply outperform the 60/40. 

During the June 2011 to August 2024 back-tested period, the Index returned 10.5% with annualized volatility of 9.1%. The 60/40, on the other hand, returned 7.9% with 9.9% annualized volatility. The resulting Sharpe Ratios were 1.16 for the Index and 0.80 for the 60/40. Importantly for investors, the max drawdown seen during the 2022 bear market was just a few percentage points for the Index and -21.5% for the 60/40. 

The upshot: If this new environment of correlated stocks and bonds continues, the Index has the potential to provide much softer losses during equity and fixed-income bear markets.

Simulated Historical Performance (Jun 23, 2011 – Aug 30, 2024)

Source: RBC Capital Markets

The Bottom Line

So, back to our original question: Is the 60/40 dead? No, but it’s uglier than it used to be. Today’s positively correlated stock and bond markets make for higher risk just as a growing share of people want to tone down volatility. A dynamic approach is required to navigate modern macro conditions. The S&P Market Agility 10 Index seeks to deliver such a solution.

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An investment in Structured Notes may not be suitable for all investors. These investments involve substantial risks. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Content and any tools discussed are provided for educational and information purposes only. Halo Investing makes no investment recommendations and does not provide financial, tax, or legal advice. Any structured product or financial security discussed is for illustrative purposes only and are not intended to portray a recommendation to buy or sell a particular product or service.

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