The End of 60/40? The Case for Diversified Value, Momentum, and Carry Risk Exposures

//, Basilico and Johnsen, Academic Research Insight/The End of 60/40? The Case for Diversified Value, Momentum, and Carry Risk Exposures

The End of 60/40? The Case for Diversified Value, Momentum, and Carry Risk Exposures

Hobbled by Benchmarks

  • Mike Aked, Rob Arnott, Omid Shakernia, Jonathan Treussard
  • Journal of Portfolio Management
  • A version of this paper can be found here
  • Want to read our summaries of academic finance papers? Check out our Academic Research Insight category.

What are the research questions?

Despite Peter Bernstein’s suggestion in 2003 that adherence to a fixed and undiversified policy portfolio is dangerous, benchmarks ( the most used of which is the 60/40) are as popular today as they were 15 years ago. The authors study the following research question:
  1. Is a broad investment opportunity set ( an un-levered and long-only version of a “value, momentum and carry” TAA system applied to a diverse universe of asset classes) a powerful source of incremental investment return?

What are the Academic Insights?

By studying three multi-asset class universes ( 2 assets US-based; 4 assets Globally-based; 15 assets Global diversified set) over the period from 1980 to 2016 and using simple model set-ups ( i.e. equal weighting of active TAA bets), the authors find the following:

  1. YES- An investor with a 2% peer-group active risk target could have added economically significant (annualized risk-adjusted alpha of 122 bps) returns in an un-levered and long only “diversified” portfolio by adding value, momentum and carry simple signals ( simplicity is used to avoid data mining). Additionally, the authors show that diversifying by strategy ( the combination of the different signals) or by the universe ( moving to the 15 asset class portfolio) coincides with a strong upward trend in alphas and t-stats.

Why does it matter?

While this study is simplistic, the authors hope to drive home the following message: “Please embrace diversification in your quest for long-term investment success.”

The Most Important Chart from the Paper:



In 2003, at the NMS Endowments and Foundations Conference, Peter Bernstein suggested that policy portfolios are overused, leading to excessive tracking-error constraints. In a 2004 article in this journal, Rob Arnott showed that the 20 largest U.S. corporate pension funds were willing to accept 12% annual volatility in total return, 15% volatility relative to liabilities, but only 2.5% tracking error relative to peers. Today, the use of policy portfolios is as dominant as it was 15 years ago; policy portfolios and their respective benchmarks continue to be a largely home-centric 60/40 allocation. In the view of the authors, there should be no debate on the benefits of broadly (i.e., globally) diversified policy portfolios. Broad diversification is a requirement for actively adding value over time. The authors believe that long-only investors can translate the lightly correlated sources of excess returns from the long–short space to their portfolios. They hope that investors will hear their plea: Please diversify your benchmarks.

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Elisabetta Basilico, PhD, CFA
Dr. Elisabetta Basilico is a seasoned investment professional with an expertise in "turning academic insights into investment strategies." Research is her life's work and by combing her scientific grounding in quantitative investment management with a pragmatic approach to business challenges, she’s helped several institutional investors achieve stable returns from their global wealth portfolios. Her expertise spans from asset allocation to active quantitative investment strategies. Holder of the Charter Financial Analyst since 2007 and a PhD from the University of St. Gallen in Switzerland, she has experience in teaching and research at various international universities and co-author of articles published in peer-reviewed journals. She and co-author Tommi Johnsen are currently writing a book on research-backed investment ideas. You can find additional information at Academic Insights on Investing.
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