Brandywine October 2021 Commentary: “Glory Days with 60/40”

0
Brandywine October 2021 Commentary: “Glory Days with 60/40”
mohamed_hassan / Pixabay

Brandywine Asset Management commentary for the month ended October 2021, titled, “Glory Days with 60/40.”

Get The Full Walter Schloss Series in PDF

Get the entire 10-part series on Walter Schloss in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q3 2021 hedge fund letters, conferences and more

A “Smarter 60/40”

For the past 40 years the 60% stocks/40% bonds portfolio produced impressive performance, with returns over 9% and a maximum loss that was 1/3 less than that of the S&P 500.

Baupost’s Seth Klarman Suggests That The U.S. Could Be Uninvestable One Day

Seth KlarmanIn his 2021 year-end letter, Baupost's Seth Klarman looked at the year in review and how COVID-19 swept through every part of our lives. He blamed much of the ills of the pandemic on those who choose not to get vaccinated while also expressing a dislike for the social division COVID-19 has caused. Q4 2021 Read More

Brandywine

But during those 40 years, the cyclically-adjusted price/earnings ratio (“CAPE”) for the S&P 500 swelled from 7.8 to more than 38 today. Similarly, the 10-year U.S. treasury note yield collapsed from its peak at over 15% in 1981 to just 1.6% today.

So it’s clear that the opportunity for a 60/40 portfolio to produce those same historical returns is now long gone. In fact, adding bonds to a portfolio today is the epitome of risk. Doing so locks in a real loss of more than 3% per year (the interest paid on the bonds minus the rate of inflation). Furthermore, one recent study by Blackrock projects future returns from 60/40 at just 3.5%. We at Brandywine have prepared a white paper that shows a return expectation of less than 2% throughout the remainder of the 2020s. Fortunately, there is a smarter way to 60/40.

Brandywine

The Innovation of “Risk Replacement”

Let’s start by laying out the original purpose of the 60/40 portfolio – to reduce risk and improve risk-adjusted returns by:

  • Reducing the exposure to high-risk equities and
  • Adding exposure to a lower-risk, non-correlated asset – bonds

There is a new way to accomplish this today while improving on the old 60/40. It is comprised of three components:

  • Maintain 100% equity exposure
  • Offset risk, not by reducing stock exposure and allocating to bonds, but instead by purchasing put options.
  • Pay for the puts with a less risky “Return Driver Diversifier”.

This describes Brandywine’s innovation of “Risk Replacement.” Its not only better than what 60/40 is expected to do today, but even improves on the historically strong performance of the “old” 60/40. This is illustrated in the chart to the upper right.

Brandywine

We encourage you to contact us to learn how we can apply this innovation to benefit you and your clients.

  • Watch our 3-minute video to learn how Brandywine Protected 500 provides you with a “smarter 60-40”
  • Book a meeting to get started . . .

We look forward to talking with you soon.

Mike Dever, CFP & Rob Proctor, CFA

Updated on

Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
Previous article Inflation Risks Will Increasingly Rattle Markets: deVere CEO
Next article David Berman And Berna Barshay On Retailers

No posts to display