Active Management Won't Save You In A Drawdown - Part 2

The “60/40 is dead” crowd really do my head in.

Every day at the minute another email lands in my inbox telling me I’m a moron for not investing in some fancy alternative strategy, because bonds and equities have decided to start moving in the same direction.

Source: AQR & Bloomberg.

And have a guess what the answer is? Some spivvy hedge fund that costs 2 and 20 to invest in and hasn’t moved in ten years. But just you wait.

There are a few reasons I’m so on board with just using bonds and stocks to construct portfolios:

1. It’s cheaper.

   
   

2. It’s simpler.

   
   

3. We have loads of data on the performance of this strategy, and it’s worked just fine historically (as we’ll see below today); and

   
   

4. MOST OF THE TIME EQUITIES WORK. Who cares what the bond/stock correlation looks like when the main driving force behind your returns (the stocks you own) are working!? You only need your bond allocation to dig you out, for the correlation to turn negative, when equities stop working.

   
   

   And the good news is that almost of the time bonds do just this1 - over the past 36 full calendar years, bonds and equities have only posted material losses together once, in 2022.

But let’s humour the industry and go through a similar exercise to the one we went through last week.

I have compared the performance of a simple 60/40 strategy (in purple) during all of the same notable market drawdowns we looked at last week, to the performance of the Investment Association Mixed Investment 40-85% Shares (in orange) and IA Volatility Managed sectors (in turquoise).

The first Investment Association benchmark encompasses all funds available to UK investors, which have an equity content of between 40%-85%. Within these constraints however the managers of these funds can invest in any asset class or market where they see value. Both to generate returns and manage downside.

With the Volatility Managed sector the clue is in the title. These funds are run to a certain volatility target, their mandate is to generate strong risk adjusted returns relative a hokey old strategy like the 60/40.

So, let’s see how they got on.

2025 - Trump tariffs

Not bad.

2022 - Inflation sell-off

2020 - COVID crash

2018 - Taper tantrum

2011 - European debt crisis

2007 - Global Financial Crisis

2000 - Dot com crash

Oh.

Now at this point you’re maybe shouting at the screen - “yes, but Dave, you’re being a sneaky beaky because the two Investment Association sectors probably had a higher stock content during these periods. Hence why they underperformed.”

OK. Fair point. So let’s look then at how each of these strategies performed over the past ten years. A period which not only has been a great one for stocks, but also included the worst year in living memory for bonds (2022).

And not only that, but over the past ten years in order to generate this outperformance we can see that 60/40 has experienced almost exactly the same amount of annualised volatility (experienced as much risk) as the IA Volatility Managed sector, and exhibited less risk than the IA Mixed Investment 40%-85% Shares sector.

All of the above performance charts (with the exception of the first one) are supplied by our friends at FE Analytics.

Past performance is no guarantee of future returns. None of the above is intended to represent investment advice to any individual. If you have any questions regarding your specific circumstances, please consult a regulated financial adviser.