Rethinking 60/40 in a fragmenting world: building more resilient allocations

The macro backdrop is shifting in ways which challenge some of the dynamics underpinning traditional 60 / 40 portfolio construction. In a regime of higher macro volatility and greater geoeconomic fragmentation, investors may therefore need to take a broader and more layered approach to ensure portfolio stability.

Key points

• The ability of bond exposure to diversify equity risk through the cycle has become less reliable as correlations have become more positive.
• Fragmentation and global rewiring increase dispersion across regions, sectors and styles, increasing the potential benefits of greater allocation breadth and active implementation.
• Investors need to assess their portfolio toolkit and may benefit from a more nimble approach within equities and fixed income.

Read more on how 60 / 40 portfolios are changing in our white paper here

Why the classic 60 / 40 has become harder to rely on

For decades, the traditional 60 / 40 portfolio embodied simplicity with two contributing pillars: equities as the primary driver of long-term growth, and high-quality bonds as the defensive contributor that dampened losses when risk assets sold off. That second pillar worked particularly well in the 2000 – 2020 period, when equity and government bond returns were often negatively correlated.

However, we are now in a regime where inflation is a more prominent driver of macro outcomes and bond-equity return correlations are more volatile. This means that duration exposure has become a less dependable hedge for equity risk.

At the same time, geoeconomic fragmentation is reshaping the opportunities available to investors. The combination of trade and supply-chain reconfiguration, more active industrial policy, and geopolitical risk contributes to divergence across regions, sectors and cash-flow profiles. In this environment, a portfolio with a concentrated, market-cap-weighted equity allocation and a single-source bond ballast is less robust. Investors require an alternate solution.

Macro trends demand a shift in approach

Today’s backdrop is not defined by a single global cycle, but by uneven growth, divergent inflation dynamics and more complex policy trade-offs. Financial conditions are easing and the Fed is leaning toward further cuts, while inflation remains disconnected across markets, with sticky US services inflation contrasted by disinflationary dynamics in Europe.

This mix has region-specific consequences. In the US, strong earnings have supported risk appetite, but valuations remain elevated and policy uncertainty persists. This broadens the range of potential outcomes and adds to investor uncertainty, even when the central scenario is constructive. In Europe, disinflation and potential fiscal traction can create selective opportunities, but political and policy risks remain relevant for risk budgeting and hedging choices. Emerging markets can benefit from improving sentiment and idiosyncratic fundamentals, yet remain sensitive to swings in US dollar exchange rates and global financial conditions.

For portfolio construction, these changing dynamics reinforce a central message - diversification is less about owning two broad asset classes, and more about deliberately combining multiple, differentiated return drivers, with explicit attention to risk profiles, correlation behaviour and liquidity under stress.

Two key focuses can help meet objectives

In this divergent regime, investors should focus on two key themes to help meet their objectives:

• Seek resilient returns when leadership is narrow and dispersion is high.
• Build defence that works in a regime where bond-equity return correlations can turn positive.

Investors can pull several levers to achieve these objectives, with active management at the core. As markets have narrowed and become driven by AI-led tech exuberance, concentration risks at a stock and theme / sector level have become elevated. Research-led active management can help mitigate risks from the bottom-up.

What this means in practice is that equity allocations might move away from index-led, market cap-weighted allocations which are dominated by the US, towards more evenly spread exposures across several other regions such as Europe or emerging markets. It can also mean shifting style factor exposures away from growth-dominated indices to spread more evenly across quality or value assets.

While this can provide portfolios with a more solid base for stability and returns, other levers can also add further resilience. Bonds remain a core component of a rebalanced portfolio, especially as higher yields have boosted their ability to deliver real income. However, they should no longer be the only defensive allocation; adding income-focused solutions in other asset classes such as equities can also provide compelling risk-adjusted return benefits.

Similarly, in a higher-correlation environment, alternative diversifiers should be employed to differentiate returns and add resilience where possible. Meanwhile, currency hedging can be used to address shifting dynamics surrounding the US dollar, whose safe haven credentials are coming into question.

Active ETFs can provide a nimble edge

A rapidly changing macroeconomic and geopolitical environment can require allocations to shift rapidly. ETFs can facilitate such shifts and provide investors with a nimble means of acquiring or exiting market access through building block solutions.

A building block approach can also help investors express the broader shifts required of modern portfolios: more intentional regional diversification in equities, a more diversified income toolkit within fixed income, or climate-aware tilts, for example.

Read more on how 60 / 40 portfolios are changing in our white paper here

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