Customize Consent Preferences

We use cookies to help you navigate efficiently and perform certain functions. You will find detailed information about all cookies under each consent category below.

The cookies that are categorized as "Necessary" are stored on your browser as they are essential for enabling the basic functionalities of the site. ... 

Always Active

Necessary cookies are required to enable the basic features of this site, such as providing secure log-in or adjusting your consent preferences. These cookies do not store any personally identifiable data.

No cookies to display.

Functional cookies help perform certain functionalities like sharing the content of the website on social media platforms, collecting feedback, and other third-party features.

No cookies to display.

Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics such as the number of visitors, bounce rate, traffic source, etc.

No cookies to display.

Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.

No cookies to display.

Advertisement cookies are used to provide visitors with customized advertisements based on the pages you visited previously and to analyze the effectiveness of the ad campaigns.

No cookies to display.

Academic Insights on Investing

The End of 60/40? The Case for Diversified Value, Momentum, and Carry Risk Exposures

Hobbled by Benchmarks

  • Mike Aked, Rob Arnott, Omid Shakernia, Jonathan Treussard
  • Journal of Portfolio Management
  • A version of this paper can be found here
  • Want to read our summaries of academic finance papers? Check out our Academic Research Insight category.

What are the research questions?

Despite Peter Bernstein’s suggestion in 2003 that adherence to a fixed and undiversified policy portfolio is dangerous, benchmarks ( the most used of which is the 60/40) are as popular today as they were 15 years ago. The authors study the following research question:
  1. Is a broad investment opportunity set ( an un-levered and long-only version of a “value, momentum and carry” TAA system applied to a diverse universe of asset classes) a powerful source of incremental investment return?

What are the Academic Insights?

By studying three multi-asset class universes ( 2 assets US-based; 4 assets Globally-based; 15 assets Global diversified set) over the period from 1980 to 2016 and using simple model set-ups ( i.e. equal weighting of active TAA bets), the authors find the following:

  1. YES- An investor with a 2% peer-group active risk target could have added economically significant (annualized risk-adjusted alpha of 122 bps) returns in an un-levered and long only “diversified” portfolio by adding value, momentum and carry simple signals ( simplicity is used to avoid data mining). Additionally, the authors show that diversifying by strategy ( the combination of the different signals) or by the universe ( moving to the 15 asset class portfolio) coincides with a strong upward trend in alphas and t-stats.

Why does it matter?

While this study is simplistic, the authors hope to drive home the following message: “Please embrace diversification in your quest for long-term investment success.”

The Most Important Chart from the Paper:

 


Abstract

In 2003, at the NMS Endowments and Foundations Conference, Peter Bernstein suggested that policy portfolios are overused, leading to excessive tracking-error constraints. In a 2004 article in this journal, Rob Arnott showed that the 20 largest U.S. corporate pension funds were willing to accept 12% annual volatility in total return, 15% volatility relative to liabilities, but only 2.5% tracking error relative to peers. Today, the use of policy portfolios is as dominant as it was 15 years ago; policy portfolios and their respective benchmarks continue to be a largely home-centric 60/40 allocation. In the view of the authors, there should be no debate on the benefits of broadly (i.e., globally) diversified policy portfolios. Broad diversification is a requirement for actively adding value over time. The authors believe that long-only investors can translate the lightly correlated sources of excess returns from the long–short space to their portfolios. They hope that investors will hear their plea: Please diversify your benchmarks.


  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).
  • Join thousands of other readers and subscribe to our blog.
  • This site provides NO information on our value ETFs or our momentum ETFs. Please refer to this site.

The post “The End of 60/40? The Case for Diversified Value, Momentum, and Carry Risk Exposures” appeared first on Alpha Architect.