Bill Kelly discusses rethinking the 60/40 portfolio and the importance of diversification
I'm Bill Kelly, the CEO of the CAIA association. We're a global credentialing body focused on better outcomes for the end investor. We have about 14,000 members in over 100 different countries, and we've been at this about 21 years. And I think our very best days for the investor for our mission are ahead of us.
Asset allocation is both a very tricky business on the one hand but very simplistic on the other. The concept of not putting all your eggs in one basket is really the hallmark of asset allocation.
There's been a lot of discussion about what happened with the 60-40 in calendar year 2022, where you had two asset classes for a rare instance in time correlating more so than not. We saw a big reversal of that in 2023, and we went from the 60-40 being dead to Lazarus coming up from the grave.
If I think about investing and think about diversification, if I just have two opportunities, why not have it across three, four, or five? So, I think just widening the aperture of investable opportunities is what the investor should be thinking about.
We speak to a lot of advisors both on the mass affluent retail high net worth side as well as institutions, and the concept of diversification is very, very simple and similar. But if I look at the conversation about the 60-40 being dead or alive, I think the narrative is we get to the high net worth space has changed and evolved quite a bit. I really like to think about more opportunities within the 60, more opportunities within the 40. And if you’re thinking about allocating to equities, why does it all have to be public? Why not get access to the private markets? If you're afraid about volatility, you can hedge some of that risk, if you need to free up some cash flow is options in play, and the same holds true for the 40 side.
The funny thing about the global financial crisis and Dodd-Frank, the banks don't lend anymore, so that lending has gone private. So there's more opportunities to get perhaps an adjustable coupon, better position in the capital stack, better collateral against your investment. You could put infrastructure in there as a fixed income substitute. So rather than think about 60-40 being something less and a third bucket of all of this stuff called alternatives, I think that's a very difficult way for the end investor to think about it. What do you think about widening the aperture around what can go into that 60? What can go into that 40, I think is going to be a much simpler discussion and perhaps a long-term investment plan for your end client.
Is now a good time to be thinking about diversification? And the answer, regardless of where we are in the market cycle, the answer is absolutely, positively yes. If you're thinking about going into public or private equities this quarter and coming out next again, should be coming in in the first place, over the long term, diversification wins and finding that right entry point is critically important.
There are a lot of obstacles, concerns, and worries about where the capital markets are today. But we have seen and will continue to see perhaps a bit more of a drawdown in the marks in the private equity space and this concept of vintage year is often talked about and that's no more complicated as to what year am I investing in private equity. You think about different entry points, vintage year does matter and you want a vintage where you're getting in as cheaply as possible and selling as well as possible. And we've seen a lot of this concept of a denominator effect, which means that in the institutional GP space, when you have a bigger drawdown in the public equity markets, they have to sell some of the private equity to top the public back off again.
So, what does that mean to the more average investor? It means greater opportunity. We're seeing a wider spectrum of opportunities in the secondary markets that have been unheard of. We see GPs that have been closed for many, many years then and now maybe open again and opportunities to get into some of their funds with a better partner. So I think there's many reasons to think about why 2023 might be a very good entry point for diversification. And the answer there is yes and why It might even be a better answer when it comes to this current vintage year.