While the traditional 60/40 stock–bond portfolio has delivered strong long‑term results, its success has been highly valuation‑dependent and has included multiple “lost decades” following periods of elevated asset prices.
Thanks to strong gains in markets over recent years, the 60/40 default portfolio has quietly morphed into a bundle of expensive U.S. growth equities and credit exposures offering narrow spreads over Treasuries.
In our view, such a portfolio is likely to disappoint investors by delivering low single-digit real returns. A valuation‑sensitive, dynamic, and more globally diversified approach is likely a better way to manage risk and improve outcomes going forward.
More Than Two Decades of Dynamic Asset Allocation Experience at Work
GMO’s Benchmark-Free Allocation Strategy is a valuation-sensitive strategy that dynamically allocates across and within multiple asset classes. It aims to deliver positive returns over inflation and better risk-adjusted returns relative to a traditional 60/40 portfolio in the long run. By avoiding expensive assets and capitalizing on undervalued opportunities, Benchmark-Free has helped investors enhance risk-adjusted returns and navigate various market cycles with greater resilience since its inception in 2001.
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Echoes of the Past as We Look Ahead
In many ways, the investment landscape today looks eerily similar to 1999, when we first began talking to clients about the portfolio concept that became the Benchmark-Free Allocation Strategy. At that time, the 60/40 portfolio had just come off 14 years of making 11.4% nominal (8% over inflation) per annum, the S&P 500 was trouncing both small caps and international indices, and valuations for growth stocks were higher than ever.
At the time, we believed that a traditional 60/40 portfolio was priced to deliver about 2% real return over the next decade, far below the level investors seek for the long run. We did, however, note that not everything was overpriced and there were ways to earn decent returns. Indeed, there were a lot of attractively priced assets back then, but to have an overall portfolio with a decent expected return, what you needed to be willing to own didn't look much like the traditional 60/40. Back in 1999, we thought that if you were willing to take the risk of looking different, the return for doing so would be incredibly high.
We’re seeing that again today. It's another time when the 60/40 has done very well for a long period. It's another time when the S&P 500 and particularly growth stocks have been the assets to beat for many years. The outperformance of U.S. over non-U.S. stocks (despite some reversal in 2025) and growth over value within the U.S., as well as the narrowing of credit spreads, has left us in a position where we still find many assets worth owning. And once again, taking advantage of those opportunities requires a willingness to look quite different than a standard, capitalization-weighted 60/40 portfolio.
Today, we believe that leaning away from expensive U.S. growth stocks and very tight credit assets and into attractively priced non-U.S. stocks and value will help generate higher compounded returns than a traditional passive portfolio. The current environment is marked by high valuations and significant change across many dimensions: economic policies (tariffs create business uncertainty and cloud the inflation outlook), geopolitical evolution (realignment of the post-WWII neoliberal order, hot wars, etc.), and a technological platform shift (AI). U.S. equities, and growth stocks in particular, are expensive and not priced for change. They’re priced for extrapolation: the extrapolation of recently strong fundamental returns far into the future. There are two things we know about fast-growing expensive stocks: 1) at some point, growth slows down (due to the law of large numbers, competition, etc.), and 2) when growth fails to meet aggressive expectations, premium valuation multiples get hit.
How Does GMO Benchmark-Free Fit in a Portfolio?
Through its valuation-sensitive approach, the GMO Benchmark-Free Allocation Strategy has historically acted as a helpful diversifier to traditional portfolios with risk concentrated primarily in market-cap-based equity exposures. Benchmark-Free is utilized by clients in three primary ways:
- as part of a dedicated alternatives program (often within a global tactical allocation sub-allocation) providing dynamic access to hedge-fund-like strategies without a fixed allocation;
- as a "core" holding managing a significant portion of an overall portfolio, aligning with the core mission of generating real returns within a specific volatility band; or
- in a "swing" or "opportunistic" manner, allowing clients to make dynamic asset allocation shifts indirectly, which is particularly valuable in volatile markets.
Regardless of how it is used, Benchmark-Free provides flexibility, dynamic management, and defensive characteristics, making it an effective diversifier and valuable component of client portfolios.
Ben Inker, Co-Head of Asset Allocation, Portfolio Manager
Returns include a substantial, one-time litigation settlement recovery received on December 16, 2024. This event contributed 2.45% to 2024 annual performance, based on a representative account. Performance for other periods, including this date, was also positively impacted, sometimes materially. Without this recovery, performance would have been lower in both absolute terms and relative to the benchmark. Additional information is available upon request. The chart above shows the past performance of the Benchmark-Free Allocation Composite (the “Composite”). Prior to 1 January 2012, the accounts in the Composite served as the principal component of a broader real return strategy. Beginning 1 January 2012, accounts in the composite have been managed as a standalone investment. Performance data quoted represents past performance and is not predictive of future performance. Net returns are presented after the deduction of a model advisory fee and incentive fee if applicable. These returns include transaction costs, commissions and withholding taxes on foreign income and capital gains and include the reinvestment of dividends and other income, as applicable. Fees paid by accounts within the composite may be higher or lower than the model fees used. A GIPS compliant presentation of composite performance has preceded this presentation in the past 12 months or accompanies this presentation, and is also available at www.gmo.com. Actual fees are disclosed in Part 2 of GMO's Form ADV and are also available in each strategy's compliant presentation. GMO LLC claims compliance with the Global Investment Performance Standards (GIPS®). A Global Investment Performance Standards (GIPS®) Composite Report is included in the Important Information section at the back of this presentation. GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. Actual fees are disclosed in Part 2 of GMO's Form ADV and are also available in each strategy’s Composite Report.
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder. Please visit https://www.gmo.com/americas/benchmark-disclaimers/ to review the complete benchmark disclaimer notice.
Disclaimer: The views expressed are the views of the Asset Allocation team through the period ending October 2025 and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Past performance is no guarantee of future results.
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