Portfolio strategies to help 60/40 investors sleep better at night


Martin Pelletier: Here are five ways to help navigate this unique market environment

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This year has undoubtedly been very difficult for conservative 60/40 investors who have been told for so long that a decent weighting in long-term bonds would help protect their portfolios during market corrections.

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We can’t blame them though, as it’s been a successful strategy for the most part. But, although rare, this has not always been the case. We count eight times a 60/40 portfolio (60% in the S&P 500; 40% in the S&P US Aggregate Bond Index) has posted negative returns dating back to 1975, with the 14% drop this year being the most pronounced. .

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The Morningstar Canadian Neutral Balanced fund manager category fared a little better, but is still down about 12.5% ​​this year.

Unfortunately, the outlook does not look encouraging as central banks continue to raise rates to bring inflation back to more reasonable levels, with the Bank of Canada making another 75 basis point hike last Wednesday. This means that bonds and some equities will continue to be negatively affected due to their duration exposure.

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The good news is that things seem to be going in the right direction, with commodity prices falling recently, even energy is showing some weakness (outside of Europe anyway), so we think the next shoe to drop will be the prices of assets such as housing.

This means that traditional 60/40 investors are probably not off the hook just yet. But for those who want to consider alternative solutions to risk management, here are five ways we’ve found to be very helpful in navigating this unique market environment.

Structured notes

Structured Notes are a bank-issued debt security that contains an embedded derivative component, which results in a coupon payment linked to the performance of a particular index, exchange-traded fund, or even basket of shares.

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There are many different ticket strategies, and they offer varying levels of downside protection compared to outright market possession. Upside participation is often limited to just the coupon payment received, but can be very attractive in this low rate environment, as it typically ranges from 5-20%.

Overall, we currently manage 30-50% of our clients’ portfolios, including our in-house fund, in notes, many of which have been custom-created for us by Canadian banks’ capital markets groups. This way, we can design them around our outlook and therefore include equity indices such as the S&P/TSX Composite and the S&P 500, or particular market segments such as agriculture, technology, materials, banks and energy.

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Energy values

Our 10-15% weighting in oil and gas stocks has been particularly beneficial this year. It hasn’t always been easy, however, with regular daily swings of 5% in either direction, especially as the Joe Biden administration continues to try to lower oil prices ahead of the midterms in the United States.

That said, our thesis remains intact and we believe it could offer an attractive advantage this winter as supply shortages accelerate and politics no longer influence paper markets.


Having less exposure to market-correlated commodities in your portfolio can really help with diversification. We currently manage approximately 3-5% of gold, energy, agriculture and precious metals through exchange traded funds or direct commodity managed funds through futures contracts.

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In addition to diversification, against the grain, this market segment is attractive as commodities have been underinvested over the past decade given their underperformance.

U.S. dollars

We like our US dollars because they’ve been a great hedge in times of heightened volatility, and we don’t expect its status as the world’s reserve currency to change anytime soon. In total, we estimate that at least a quarter to half of our client portfolios are made up of US dollar-denominated assets.

Liquid Alternatives

We have a smaller share of liquid alternatives such as long/short, market neutral and derivative-based strategies which have done a good job of providing a consistent return profile across all market environments.

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We would, however, be cautious here and stress the word liquidity, as some private Hedge Funds claim low correlations but lack market transparency regarding the pricing of their underlying assets.

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Overall, although fixed income is at our lowest permitted levels, we were able to shield a significant portion of this year’s correction with this tactical approach to risk management.

We continue to maintain our core position in US and Canadian equities as they will be bound to participate in the rally once monetary tightening ends, while we are significantly underweight the markets of Europe, Australasia and Middle East (EAFE) and have zero weighting in emerging markets due to their unique risks which we believe are simply too high for the potential return.

Martin Pelletier, CFA, is a Senior Portfolio Manager at Wellington-Altus Private Counsel Inc, trading as TriVest Wealth Counsel, a private client and institutional investment firm specializing in risk-managed discretionary portfolios, audit /investment monitoring and advanced tax, estate and wealth planning.


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