Once upon a time… 60/40 multi-asset portfolios provided absolute returns. Fulcrum’s Abdoula on why today’s world is different. 

by | Jan 12, 2023

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Adapting your asset allocation strategy within multi-asset portfolios for all weather risk mitigation has never been more important. Nabeel Abdoula, Deputy CIO, Fulcrum Asset Management, shares his thinking with IFA Magazine as to what that might look like in practice. 

Once upon a time, we lived in a world where equity and bond markets seemed to show no end of rallying higher and 60/40 portfolios were able to provide diversification. 

It was a world in which recession risk was the bogeyman we all feared and worried about. To assuage those fears, central banks stepped in to provide liquidity and protect the markets at any cost following the Global Financial Crash. 

In that environment, where the storm clouds of recession lurked – yet remained – on the horizon, 60/40 portfolios worked perfectly well in providing absolute returns. 


The problem, however, is when the macro environment changes, as it did in 2022, and equities and bonds move in lockstep. When inflation fears become elevated, commodity prices rise, and central banks tighten their monetary policies, which is negative for the bond ballast and means the 60/40 portfolio no longer has the same diversifying characteristics. It looses its ability to offer adequate inflation protection. 

Diversification is not static 

Traditional portfolios, 60/40 (“balanced portfolios”) or risk parity portfolios, were conditioned on a macroeconomic environment driven by demand-led shocks. 


The premise was that the negative correlation between bonds and equities would remain, thereby protecting investors against abrupt falls in the more volatile risky asset (equities) as the “risk-free” asset (bonds) gained in value. The last two decades experienced consistently high returns for passive holders of balanced portfolios and risk parity portfolios, driven largely by the nature of the macroeconomic environment. 

Today is a manifestation of the lack of robustness of 60/40 portfolios that focus on the history of the last 20 years in the belief that they will still be relevant for the next 20 years. 

Unfortunately, this is a fallacy. 


Instead, investors need to think about diversification more broadly by taking into consideration the prevalence of the macroeconomic environment over the full course of their investment timeline. 

The fact is, diversification is not a constant but a function of the macroeconomic environment. Having a permanent macro allocation sleeve in one‘s portfolio cannot be underestimated. It should not be something that only applies when the going gets tough. 

Diversification means having the right asset mix in a portfolio for the long term. It does not depend on what is happening today, or what the latest angst might be in the market. Rather, it depends on whether a portfolio is robust enough to cope with a combination of events that may occur during the investment lifecycle. 


Nothing is inherently wrong with a traditional 60/40 portfolio. However, the macro environment has changed and revealed what the inherent risks are in that type of allocation model. Identifying those 

vulnerabilities and adjusting to them is harder, and where a macro-informed strategy can help navigate these market transitions. 

If, over the last year, you and your client had made the decision that they would want to retire in five years’ time, in the current macro environment they’re probably going to work three more years. That is what can happen when there isn’t appropriate diversification to meet the desired outcome which is sought from a portfolio. 


It’s the aim of many clients to make their pension pay for their retirement. 

To reach it requires dynamically adjusting their portfolio by taking into account the prevailing environment, versus the one they were in previously, and asking: 

1) What are the expected returns on the assets? 


2) What is the long-term investment horizon? 

All weather risk mitigation protection 

The post-Volcker world was one that was dominated by demand shocks, fears of recession, low inflation and both monetary and fiscal policy acting in symphony to stablise the markets. Investors adjusted their portfolios to reflect that diversification, but the world has changed. 

The all weather risk mitigation portfolio of today is not the all weather portfolio of yesteryear. 

We are of the view that the “all weather risk mitigation” portfolios of today are likely to have different characteristics given the prevailing macroeconomic environment. 

As an example, we are cautious on “inflation false friends”, such as Real Estate and Treasury-Inflation Protected Securities (TIPS) – these did not protect investors during the second quarter of 2022 as inflation adjusted nominal yields (real yields) priced sharply higher. 

Since 2008, we have faced multiple types of equity down markets. Despite this, the Fulcrum team has been able to deliver robust return outcomes for client portfolios. We’ve achieved this by embedding the philosophy that diversification is not a constant but a function of the macroeconomic environment, in the way that we design, build and manage portfolios. 

The moral of the story is that a well-diversified portfolio, capable of adapting to the changing macroeconomic narrative, means we all have a better chance to live happily ever after.

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