John Husselbee, head of multi asset at Liontrust, has described 2022 as one of the most challenging years of his career as “diversification completely failed”.
Speaking in an interview on PA+, Husselbee said in a career which spans over four decades, last year was one of the worst he has encountered in performance terms, particularly for his lower risk investors.
“We have never had a calendar year in my investment career where we’ve had a negative return on equities with a negative return on bonds,” he said.
However despite this breakdown, which Husselbee described as a “humbling” experience, he does not believe it means the end for 60/40 investing as a model for investors to diversify their portfolios.
“When you have these humbling experiences, as a manager you have to go back and say ‘what did I miss and where did it wrong?’” he said.
To do this, Husselbee said investors need to look back at history, and in analysing 100 years of data in the US, he said it has happened three times before; 1969, 1941 and 1931.
“So this is the fourth year out of 100 [that diversification has failed], so it happens but there’s a low probability to it,” he said. “In the other 96 years it has worked, so probability wise I think the argument over 60/40 being ‘dead’ is wrong.”
Future of 60/40
Indeed, Husselbee pointed to the mini banking crisis in the US in March this year, in which bond yields fell as equities fell as evidence of bonds providing diversification again.
“This is not to say you can’t evolve the 60/40 portfolio going forward because I think you can,” he added. “The way that asset classes and indeed investment strategies have evolved over my career provides you with further means for diversification, but it is all about how you divide them up.”
For Husselbee, it is about dividing asset classes, including alternatives, into what he calls “return enhancers” and “return reducers”.
“Bonds are most definitely return reducers, while a return enhancer could be something like infrastructure where you are looking for a return that is going to be at a different stage of the cycle to equities,” he said.
“As a result, investors need to be really clear about what they want within a 60/40 portfolio and if they do want to shovel out a few of the bonds, are they going to shovel them out for further risk reduction or further risk enhancement?”