The traditional 60/40 split between stocks and bonds was never meant to be chiseled in stone, but rather was a starting point for building a portfolio that offered growth from stocks and safety in fixed income. Investors could push the balance one way or another depending on whether the stock market seemed over- or under-valued (though plenty hurt their own returns in the process). But according to AQR Capital Management manager and founding partner Cliff Asness, simply weighting your portfolio toward one or the other isn’t good enough right now and investors should consider adding managed futures into the mix.
Momentum strategies can offer returns in a bear or bull market
“I think it’s crazy to believe that stocks, on a risk-adjusted basis, will beat everything else by a lot for the long term,” says Asness, quoted in a recent Morgan Stanley report, but that doesn’t mean bonds are any better. Analysts will argue over whether US equities are expensive, but no one thinks bond yields are exciting.
For Asness, that’s where managed futures come in. Managed futures are a momentum strategy that relies on people over reacting to market events, driving prices too high or too low depending on the news, and positions itself to take advantage of a long trend. Many managed futures/CTA funds struggled in 2013, though AQR was up 9%. That isn’t a lot if you compare it to the S&P 500 over the same period, but the whole point is that managed futures can bring absolute returns regardless of whether the market goes up or down.
“It’s supposed to make a modest amount of money and [perform well] when you see big trends,” says Asness.
Asness: US stocks and bonds aren’t the only options
Obviously Asness is touting his own product for investors, and many value investors will object to the idea that they should diversify their portfolios by relying on technical strategies, but he does have an interesting point about both stocks and bonds being undervalued. Fortunately, US investors aren’t confined to the domestic market and many of them will look for deals abroad when there aren’t many at home. Barclays analysts Dennis Jose, Ian Scott and Joao Toniato found that when the relative performance of European value stocks goes up, Americans become more likely to buy European stocks.
So if the normal diversification into US bonds and equities won’t cut it anymore, and you’d rather not start momentum trading, more regional diversification could be the answer.
