The 60% equities/40% fixed income split was the gold standard of portfolio construction for decades, but these days, some market observers are debating whether or not the idea of 60/40 has run its course.
Writing obituaries for 60/40 may be premature, but it’s clear this is a concept ripe for disruption and fresh approaches. Avenues for achieving that come by way of Siegel WisdomTree Portfolios, a series of model portfolios offered by the exchange traded funds issuer.
“WisdomTree collaborated with our Senior Investment Strategy Advisor—Dr. Jeremy Siegel, Professor of Finance at Wharton School—to construct portfolios designed to challenge the traditional 60/40 portfolio approach by attempting to improve the current income generation and longevity profiles. These portfolios include a Global Equity model and a multi-asset ‘Longevity’ model,” according to WisdomTree.
The Global Equity model portfolio is entirely allocated to equity-based exchange traded funds and sources its income from dividend strategies, while the Longevity model portfolio has a 72% weight to stocks, 22% to bonds, and 6% to alternatives.
The Global Equity model portfolio is relevant today because, as seasoned fixed income investors know, the lower a bond’s yield is when an investor gets involved, the more potential upside is capped.
“Our internal analysis, based on capital market assumptions of a real equity return of 4.5%–5% for equities and a real return of 0% for bonds, suggests that a 75% allocation to equities accomplishes two objectives versus a traditional ’60/40 portfolio: (1) it potentially minimizes the probability of outliving your money over a 30-year time horizon, and (2) it also potentially increases the ability to fund legacy objectives,” according to WisdomTree research.
With dividend yields and 10-year Treasury yields almost in line with each other, advisors have another reason to consider the Global Equity model portfolio. As this year is proving, there’s ample room for dividend growth, and that can help client portfolios better contend with inflation than anemic government bond yields.
“On an additional note, current dividend yields from the equity markets remain comparable to the nominal 10-Year Treasury yield,” notes WisdomTree. “We argue, however, that equity dividend yields are far more sustainable, with expected improvement as earnings and the economy recover. In addition, we believe equities hold the potential for upside total return, while bonds do not (if held to maturity).”
For clients that demand fixed income exposure, the Longevity model portfolio is appropriate, as it takes a quality-based approach to bonds and can potentially generate higher levels of income than simply filling a portfolio with Treasuries.
For more on how to implement model portfolios, visit our Model Portfolio Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
