An excellent piece was sent to me on the weekend from Bradley A. Jones, analyst at Deutsche Bank, entitled Rethinking Portfolio Construction and Risk Management. A valuable read free from the everyday shark chum so ubiquitous in portfolio management theory. Great points and excellent charts. (It also amounts to a wonderful summary of why we manage money the way we do at Venable Park). You can read the whole 60 page report here. Here are his Concluding Remarks:
Evolution Ahead in Asset Allocation. The 60/40 Policy Portfolio, still the industry default setting, is far riskier than most think:
- It is subject to unacceptably large and lengthy drawdowns/shortfall risk.
- Has substantial embedded correlation risk (based on statistical/economic factors)
- Ignores regime dependence, and is ill-equipped for a ‘stag-lite’ macro environment
- At current valuation levels, offers virtually no prospect of realizing returns in line with the long-term average of 4% p.a. in real terms (more likely 1% p.a.)
Good stuff. Quite a breath of fresh air.