While arguing the 60/40 model of diversifying is not dead, Yoram Lustig, head of multi asset solutions at T Rowe Price, believes it needs to be modernised to be more fit for purpose.
Speaking in an interview on PA+, Lustig said while reports of the method of investing 60% of a portfolio in equities and 40% in bonds to diversify as being dead are exaggerated, he conceded the construct is not as effective as it once was.
“I think it needs to be modernised,” he said. “If we look at the 40% which in the past was traditionally being held in UK gilts, it now makes sense for investors to diversify their diversifiers.”
For example he said to diversify equity risk, instead of holding gilts investors should look more to global bonds and then hedging the currency back to sterling or other safe haven currencies.
However while arguing attention should be paid to alternative assets with defensive characteristics, Lustig noted which alternatives to use depends on the type of investor involved.
“Large institutional and sophisticated investors with a very long-term investor horizon should include some alternatives to add more sources of return and diversify some of the risks,” he said.
“However more retail and intermediary investors may appreciate more liquidity and simplicity because some of the alternative assets [such as property and private equity] are illiquid, more expensive and complicated to govern. So while alternatives have a role to play in portfolios, it really does depend on the type of investor.”
Indeed depending on the type of investor, Lustig said 60/40 is becoming a less relevant catch all, with many preferring a more defensive 20/80 split, others 50/50 and more growth investors wanting an 80/20 mix.
Looking at the future of multi-asset investing, Lustig said the best case for the industry is that it continues evolving, not only focusing on investment needs but also on trying to make the world a better place through ESG and impact investing.
“The worst case scenario is that we have a stagnation in the development of multi-asset portfolios and some of them remain too complicated, varied across different investments but without really giving any diversification,” he said.
To see the full interview click here: Asset Allocators with Yoram Lustig
