I am often asked what keeps me up at night.  I used to respond, “My children” but they are actually sleeping quite comfortably these days.  My colleague Art Steinmetz, perhaps offering a better response, says that what keeps him up at night is the current composition of investors’ portfolios.  Art’s been known to say, “Investors’ portfolios are perfectly positioned for the outcomes of the past.”  That’s great alliteration.  Current asset allocations, generally comprised of 60% in domestic U.S. stocks and 40% in government-related fixed income securities, represent portfolios that may have been justified decades ago when U.S. stocks made up over 70% of world market capitalization and treasury rates actually outpaced the rate of inflation.  Today, U.S. companies represent less than half of the world’s market cap, and treasury yields after inflation are flat to negative and are pushing up against the limitations of zero yields.  It’s not hard to see why Steinmetz has sleepless nights.

We recommended the New 60/40 allocations to investors to help them build more globalized and diversified portfolios that are designed to offer growth, real income, and protection against inflation and other risks.  We maintain that a revised 60% equity allocation would, at the very least, be more in line with world equity market capitalizations, while a revised 40% fixed income allocation would diversify into higher yielding credits, international bonds, and a mix of alternative assets.

This is a hypothetical example which is for illustrative purposes only and does not predict or depict the performance of any fund.
See below for index definitions.
Past Performance does not guarantee future results.

Investors have generally been receptive to the concept, although I’m often asked for proof statements.  Herein lies a bit of the rub.  The New 60/40 portfolio is a look at asset allocations for the 21^st century, rather than the century passed.  Forward-looking portfolio construction doesn’t always allow for the perfect growth of a $10,000 chart or the optimal risk-return scatterplot chart.  For example, I agree that for much of the past 32-year bull market in treasuries, fixed income investors would have been served just fine owning a government-related security.  I have the growth of a $10,000 chart and scatterplot graph to prove it.  But as the regulators are known to say, past performance is no guarantee of future results.  I believe today’s low interest rate environment makes it mathematically impossible for the same 40% allocation to provide similar portfolio benefits.  Rising interest rates would of course only make matters worse.

More than a year has passed since we recommended the new portfolio allocations.  Here’s our first proof statement, albeit limited time.  In viewing performance we remind investors that the New 60/40 provides a framework for the average investor.  Investors should work with their financial advisors to formulate the most appropriate mix for their individual needs.

Since recommending these allocations (01/01/2012), the New 60/40, as depicted in the table above, has outperformed a 60%-40% mix of the S&P 500 Index and the U.S. Barclays Aggregate Bond Index by almost 10%. Past performance does not guarantee future results.

Perhaps more importantly, the New 60/40 has outperformed the old model by almost 2.75% as of February 22, 2013, during the 57 basis point backup in treasury rates that commenced on July 24, 2012. When interest rates rise, bond prices generally fall. Much of the outperformance is directly attributable to the returns of the New 40%, which by design are less interest rate sensitive than the U.S. Barclays Aggregate Bond Index.

This is a hypothetical example which is for illustrative purposes only and does not predict or depict the performance of any fund.
Source: Bloomberg 2/27/13. Old 60/40 performance composed of a mix of 60% Domestic Equities, represented by the S&P 500 index; and 40% High Grade Bonds, represented by the Barclays Aggregate Bond Index. New 60/40 performance composed of a mix of 60% Global Equities, represented by MSCI AC World Index; 8.33% High Grade Bonds, represented by the Barclays Aggregate Bond Index, 8.33% High Yield Bonds, represented by the Barclays U.S. Corporate High Yield Bond Index, 8.33% International Bonds, as represented by an equal portion of the Citi World Government Bond Index and the JP Morgan Emerging Local Market Index; and 15% Diversified Alternatives, represented by an equal weighting of Currencies, represented by the JP Morgan Tradeable U.S. Dollar Index, Commodities, represented by the S&P Goldman Sachs Commodities Index, Real Estate represented by the FTSE NAREIT Equity Total Return Index, Gold by the spot price of Gold, and MLPs represented by the Alerian MLP Index. See below for index definitions.
Past Performance does not guarantee future results

We recognize that nearly 14 months do not make a trend.  Still, we press ahead short on proof statements but confident in our beliefs that asset allocation models must evolve.  We maintain that the New 60/40 portfolio better reflects the breadth of opportunity in the world, and should provide necessary diversification benefits and provisions against specific risks.

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GENERAL RISKS: Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and the Fund’s share prices can fall. Investing in foreign, emerging market and small cap companies, high yield bonds, currency, commodities, REITs, MLPs and precious metals all entail specific and unique risks. Investors must read each respective prospectus to learn more about these risks before investing.

The S&P 500 Index is a broad-based measure of domestic stock market performance.

The Morgan Stanley Capital International (MSCI) All Country World Index is designed to measure the equity market performance of developed and emerging markets.

The U.S. Barclays Aggregate Bond Index is an investment-grade domestic bond index.

The U.S. Barclays U.S. Corporate High Yield Index includes publicly issued U.S. dollar denominated, non-investment-grade, fixed rate, taxable corporate bonds.

The Citigroup World Government Bond Index (USD Unhedged) is composed of domestic and foreign government bonds with maturities over one year.

The JPMorgan ELMI Index tracks total returns for local-currency denominated money market instruments in the emerging markets.

The JPMorgan U.S. Dollar Tradable Currency Index is based on trade-weighted exchange rate indices and tracks performance versus 16 major trading partners of the U.S. determined by 2000 trade data.

The S&P Goldman Sachs Commodity Index (GSCI) is a composite index of commodity sector returns representing unleveraged, long-only investment in commodity futures across 24 commodities.

The FTSE National Association of Real Estate Investment Trusts (NAREIT) Equity REITs Index consists of companies that own and operate income-producing real estate that have 75% or more of their respective gross invested assets in the equity or mortgage debt of commercial properties.

The Alerian MLP Index is a composite of the 50 most prominent energy Master Limited Partnerships (MLPs).

Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any particular investment. Past performance does not guarantee future results.