T. Rowe's Page Offers Solution to 60/40 Conundrum

(Bloomberg Opinion) -- How can asset allocators manage riskier assets when stocks are expensive and bond yields are near record lows? That is the challenge confronting Sébastien Page, head of T. Rowe Price’s $363.5 billion multi-asset division and this week’s guest on the Masters in Business podcast. Page, who also sits on the firm’s executive management committee and its asset allocation committee, which oversees $1.31 trillion, is the author of 2020’s “Beyond Diversification: What Every Investor Needs to Know About Asset Allocation.”

A portfolio mix of stocks and bonds face two headwinds: low yields limits the potential capital appreciation of bonds, and richly priced stocks lower expected returns for equities. That combination has led investors to embrace greater equity exposure and take on more risk than usual. A traditional “60/40” mix of stocks and bonds has morphed into something closer to an “80/20” portfolio.

Page believes investors should “re-optimize” model portfolios by shifting 12% of their allocations from bonds to low volatility alternatives, including 5% to risk premium or factor strategies. Within equities, he has been recommending shifting 5% to 10% of long-only stocks to a dynamic risk management or tactical strategy. Page believes Treasuries no longer provide the same “volatility hedge” as in the past. Instead, asset allocators should be looking at strategies such as absolute return, along with other diversifiers like gold or investment-grade bonds, and even low interest rate currencies like the Japanese yen.

Page cites his mentor as teaching him the secret to happiness: “Lower your expectations.” Page notes investors should apply the same approach to bonds.

A list of his favorite books are here; A transcript of our conversation is available here.

You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our Masters in Business next week with Adam Karr, a portfolio manager at Orbis Investments and head of the firm’s U.S. division. The firm, which manages $37 billion, has a unique fee approach in that they only charge if the firm outperforms, and refund fees when it underperforms.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Barry Ritholtz is a Bloomberg Opinion columnist. He is chairman and chief investment officer of Ritholtz Wealth Management, and was previously chief market strategist at Maxim Group. He is the author of “Bailout Nation.”