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MiB: Re-Optimizing 60/40 Portfolios in an Era of Low Yields

Summary:
How can asset allocators manage risk assets when stocks are pricey and yields are low? That is the challenge confronting Sébastien Page, head of T. Rowe Price’s 3.5 billion multi-asset division. He also sits on the firm’s executive management committee and its asset allocation committee, which oversees .31 trillion in assets. Page is the author of 2020’s “Beyond Diversification: What Every Investor Needs to Know About Asset Allocation.” A portfolio mix of stocks and bonds face two headwinds: lowered yields limits the potential capital appreciation on bonds, and richly priced stocks lower expected returns for equities. That combination has led investors to embrace greater equity exposure and take on more risk than usual. A traditional “60/40” mix of stocks and bonds has morphed into

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How can asset allocators manage risk assets when stocks are pricey and yields are low?

That is the challenge confronting Sébastien Page, head of T. Rowe Price’s $363.5 billion multi-asset division. He also sits on the firm’s executive management committee and its asset allocation committee, which oversees $1.31 trillion in assets. Page is the author of 2020’s “Beyond Diversification: What Every Investor Needs to Know About Asset Allocation.”

A portfolio mix of stocks and bonds face two headwinds: lowered yields limits the potential capital appreciation on bonds, and richly priced stocks lower expected returns for equities. That combination has led investors to embrace greater equity exposure and take on more risk than usual. A traditional “60/40” mix of stocks and bonds has morphed into something closer to an “80/20” portfolio.

Page believes investors should “re-optimize” model portfolios by shifting 12% of the allocation from bonds to low volatility alternatives, including 5% to risk premium or factor strategies. Within equities, he has been recommending shifting 5-10% of long-only stocks to a dynamic risk management or tactical strategy.

Page believes Treasuries no longer provide the same “volatility hedge” they used to. Instead, asset allocators should be looking at strategies such as absolute return, along with other diversifiers like Gold or Investment Grade Bonds, even low interest rate currencies like the Japanese Yen.

He cites his mentor as teaching him the secret to happiness: “Lower your expectations.” Page notes investors should apply the same approach to bonds.

A list of his favorite books are here; A transcript of our conversation is available here.

You can stream or download our full conversation on iTunesSpotifyStitcherGoogleBloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our Masters in Business next week with Adam Karr, portfolio manager at Orbis Investments and head of the US division. The firm, which manages $37B in assets, has a unique fee approach, where they only pay if they outperform, and refund fees when they underperform.

Barry Ritholtz
Barry L. Ritholtz is the founder and chief investment officer of Ritholtz Wealth Management. Launched in 2013, RWM is a financial planning and asset management firm, with over $175 million in assets. The firm offers a variety of services to the investing public, including LiftOff — a low cost online-only investment site.

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