Diversification in a changing landscape

While the saying might be a tired one, the theory behind it is as relevant to investing today as ever.

But although the concept of diversification remains the same, the way in which to achieve it in investment portfolios has moved on.

The evolution of the 60/40 portfolio

Historically, funds that offered investors exposure to more than one asset class have been known, rather simplistically, as 60/40 portfolios. They invested in a mix of mainly equities and bonds, with the larger weighting in equities, given their ability to deliver higher returns but with slightly more risk.

To the modern investor, it might look like investors were still putting all their eggs into only two baskets.

Heather Christie, head of the adviser and platform sales team at BlackRock, explains that the traditional 60/40 portfolio split is a “simple rule of thumb” stemming from the early 1950s.

As Christie points out, the only markets at the time that were especially accessible to investors were equities, fixed income and cash.

Since then, the industry and investors’ preferences have evolved.

“Now, 70 years on, two things have changed: a greater variety of investments are accessible to everyday investor, and using data and technology, we can understand far more about the risks involved,” she says.

Investors now have exposure to myriad alternative asset classes, including commodities, infrastructure, private equity and hedge funds, as well as to broader themes, such as healthcare, technology and nutrition.

It is not only the types of assets that have broadened out, so too have the vehicles that advisers and their clients can access them through, including actively-managed funds and investment trusts, and passive products.

“Investors can now access almost any market via low-cost exchange-traded funds (ETFs),” explains Christie. “All of these areas can bring diversification benefits, and can ultimately lower the risk of a total portfolio, thus helping people achieve more predictable outcomes.”

Achieving portfolio diversification should be easier than ever, then.

But against this backdrop of ongoing industry innovation, investors have also had to contend with equities and bonds becoming more highly correlated, and within a lingering low-yield environment.

More recently, inflation has emerged as a key concern for advisers and their clients. The reopening of economies globally, after ongoing lockdowns, and delayed supply chains have caused inflation to spike.

“Inflation-linked bonds have been a particular area of diversification – especially compared to bonds whose coupons aren’t linked to inflation. Gold has also proven a good diversifier against the risk of interest rate moves in recent times,” Christie says.

Risk and return

The industry has been quick to adapt to the macro environment and to investor preferences, by creating funds and investment solutions that meet clients’ lifestyle needs. 

The ‘old-style’ 60/40 portfolio composition may have provided diversification, but they did not reflect the risk and return appetite of investors.

“As an industry, we’re getting better at framing investments in terms of the ‘why’ for our investors,” says Christie. 

“Of course, we always aim to improve at how we build well-diversified portfolios with institutional-grade risk management, but I think we’re getting better at building them in a way that aligns with investors’ goals, and their ability and willingness to take risk in the pursuit of achieving those goals.”

The increasing interest from advisers’ clients in portfolios that invest with ESG factors incorporated is a good example of this.

“It’s wonderful that data, technology, and market access now allows us to build high quality portfolios that align to investors’ risk and return needs as well as their increasing preference for sustainability in all areas of their lives – including their investments,” Christie adds.

What is the MyMap range?

After identifying a gap in the multi-asset fund market for a suite of simple, low-cost funds, which could deliver against investors’ goals because they took a ‘risk-first’ perspective, BlackRock launched its MyMap range of funds.

The MyMap portfolios are a series of UK-domiciled, daily-dealing multi-asset funds, investing in a diversified portfolio of iShares ETFs and index funds.

So far, the MyMap range comprises four core growth portfolios of varying levels of risk and one ESG portfolio, all with a total expense ratio (TER) of 17bps, and a recently-launched income portfolio, with a TER of 28bps.

BlackRock has identified that there is scope to expand the range further, given growing investor awareness of the environmental, governance and social impact of their investments, as well as the ongoing need for income.

Christie says: “BlackRock is committed to making sustainability our standard, and as such it was incredibly important to us that we offer investors the choice of investing in an ESG version of the existing core MyMap portfolios. 

“We only see this area growing as individuals increasingly align how they consume and invest with their beliefs.”

If you’re keen to know more about the 60/40 debate, join an upcoming webinar hosted by FTAdviser and sponsored by BlackRock, in which a panel of expert speakers will discuss if the traditional 60/40 strategy is still relevant. This 50-minute webinar, which takes place on 30 November at 11am GMT, will bring together financial advisers seeking to secure the greatest returns for their clients and will be chaired by Damian Fantato, Digital Editor, FTAdviser.

Register here for the webinar on “The changing landscape: Is the 60/40 balance fit for the future?”