The views presented here do not necessarily represent those of Advisor Perspectives.
Nobody knows for sure if the 60/40 portfolio is dead. But any extended period of inflation probably would kill it, as it has in the past.
Bonds, which are fixed-dollar obligations, are almost guaranteed losers if they have maturities of any significant length in an inflationary period. Even if they wind up eking out victory over inflation, it won’t likely be by the margin anticipated before the spike.
And while stocks tend to beat inflation over multidecade periods, they can struggle mightily during high inflation periods, which tend to compress P/E ratios. That’s because the discount rate applied to future profits to arrive at a present value of a productive asset goes up with inflation, hammering those profits harder for not being in your hands today.
Moreover, if inflation doesn’t materialize, investors have President Trump’s attempt to remake the geopolitical order, including its financial contours, to worry about.
Trump is going further than when Richard Nixon took the dollar off the gold standard. Trying to revalue the greenback lower, making budget cuts to support a spending bill that delivers tax cuts at a time of record debt-to-GDP levels, withholding military support for Europe, and implementing the highest tariffs in nearly a century constitute an attempt to reconfigure the post-World War II global order.
Add to this Trump’s attempt to destroy the independence of the Federal Reserve, a strategy often used in emerging market countries, with the ultimate effect of producing inflation, and his firing the head of the Bureau of Labor Statistics, creating doubts about the reliability of inflation numbers. All of a sudden, portfolio construction becomes a stranger proposition than it has been.
So far this year, the bond market has been jittery, with long rates rising the last time short rates were cut, perhaps anticipating the emerging market playbook. But they have dropped now, later in the year, perhaps in anticipation of a recession. Stocks have soared since early April, with the S&P 500 up more than 30%, but only after plunging earlier in the year on initial tariff announcements.
Through all the turbulence, the balanced portfolio still looks like a winner, with the Vanguard Balanced Index Fund (VBIAX) up 8.87% through the end of August.
But perhaps investors shouldn’t be so complacent. The problem is what to do about a stock/bond portfolio whose components may not offset each other adequately for an extended period of time.
The Diversifier: Systematic Trend
The academic literature seems to point in one direction: a systematic trend strategy using managed futures.
That means a portfolio of futures contracts on at least 50 or 60 different commodities, currencies, equity, and bond markets designed to follow trends. It is impossible to track the long-term spot price of most industrial or agricultural commodities without taking delivery of them, but that’s not the point of this strategy. It is to capture a shorter-term trend in price movement.
Momentum is a factor identified by academic finance, and this strategy uses it to capture trends not just in equities, but across multiple asset classes simultaneously. Every managed futures portfolio is “a quantitative, levered, long-short, derivatives-based black box,” said Andrew Beer, managing member of DBi, a firm that runs the iMGP DBi Managed Futures Strategy ETF (DBMF) that seeks to replicate a combination of the 20 largest strategies at low cost.
Each black box has its own criteria — whether the 20-day moving average of something is above the 200-day, for example. And yet these weird black boxes, however the details are arranged in a particular strategy or fund, can be useful in a portfolio.
As a 2010 paper from AQR, a condensed version of other academic papers from the firm, argues, “‘Managed futures’ is an alternative investment that has historically achieved strong performance in both up and down markets, exhibiting low correlation to traditional investments. It was one of the few investing styles that performed well in 2008 as most traditional and alternative investments suffered.”
Similarly, Kristof Gleich of Harbor Funds told AdvisorPerspectives in response to the question of what can offset stocks and bonds, “Hold more commodities as well; we have HGER (Harbor Commodity All-Weather Strategy ETF)… .” Gleich continued, “Commodities as diversifier and return enhancer [are] underappreciated and under-owned.”
He has a point. There are 37 funds in Morningstar’s Systematic Trend fund category, with assets of only around $17.5 billion.
There are only 22 funds with three-year records through August 2025. The experience of 2022, when the S&P 500 lost around 18% and the Bloomberg US Aggregate dropped 13%, may have spurred interest in something that could offset the weakness of the two traditional asset classes in a rising rate environment.
It’s worth noting 19 of the 21 funds that existed in the calendar year of 2022 delivered a positive return that year, and the two that delivered losses shed a relatively modest 5.83% and 1.88%. Seventeen of the funds delivered an 11% gain or more, and 11 of the funds (slightly more than half) delivered a gain of 20% or more. AQR’s fund, the AQR Managed Futures Strategy Fund (AQMNX), finished second in the category, with a breathtaking 50% gain.
Investors should be aware of categorization issues as well. At least one other fund, the Standpoint Multi-Asset Fund Institutional Class (BLNDX), gains equity, bond, and commodity exposure through a trend-following futures strategy. However, it sits in Morningstar’s Miscellaneous Allocation category.
Gleich also said, “If you look at retail, the asset pool, $0.75 of every $100 is allocated to commodities. That number should be closer to 5% and maybe as high as 10%... .”
The average Systematic Trend fund posted a 21.5% gain in 2022. Taking Gleich’s advice and putting 10% of an allocation in the average fund with the rest in the Vanguard Balanced Index fund (which has a 60/40 allocation to domestic stocks and bonds), we arrive at a portfolio loss of around 13% for 2022. That’s better than the 16.9% loss for the Vanguard fund by itself.
The AQR paper has more meaningful longer-term numbers. Using a hypothetical 20% allocation to a managed futures strategy and 80% in a 60/40 portfolio from 1985 to the end of 2009 produced an 11.6% annualized return compared to 9.9% for the plain 60/40 portfolio.
Chaos Protection
The portfolio with the managed futures allocation also had a higher Sharpe ratio (volatility-adjusted return) and lower worst-month and worst-drawdown statistics compared to the plain 60/40 allocation. The worst drawdown comparison was noteworthy. The portfolio with managed futures experienced a 22.8% worst drawdown compared to a 32.5% worst drawdown for the plain 60/40 allocation.
Overall, managed futures seem to shine most “when the world goes through some regime shift,” said Beer.
Some investors are anticipating no regime shift. For all of President Trump’s attempts to remake the global order, there could be a reversal should markets react badly. There’s also the possibility that his unilateral application of tariffs will be ruled unconstitutional.
But for investors who want some chaos protection, something in their portfolio that’s not correlated to U.S. or developed market stocks and bonds, a managed futures strategy could be the ticket.
John Coumarianos is the founder and CEO of Mindful Advisory LLC.
The author or his clients may or may not own securities mentioned in this article
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The views presented here do not necessarily represent those of Advisor Perspectives.
