60/40 isn't dead. Taking a passive approach may be

The philosophy behind the classic 60/40 portfolio is simple but elegant. A 60% allocation to equities offers the potential for capital growth, while a 40% allocation to bonds or fixed income offers steady returns and a ballast against market downturns.

In traditional thinking, it offers a great mix of growth, diversification, stability and protection. 

Unfortunately, the traditional thinking no longer applies, says Wilson Asset Management Portfolio Strategist Damien Boey, given how the relationship between the asset classes has changed.

"Passive 60/40 portfolios are built on the assumption that bonds and equities have near-zero or negative correlation with each other in total return terms," he said. "However, we are clearly in a regime where bonds and equities are positively correlated, in part because of high inflation uncertainty."

"This doesn’t mean that the 60/40 portfolio breaks down, but it does increase the risk profile of a passively-managed portfolio. That’s even the case if interest rate and equity market volatility are relatively low."

The fact of the matter is that 60/40 portfolios are still a worthwhile strategy and can still deliver great risk-adjusted returns for investors. But an increasingly demanding market and complicated macro picture means it may no longer work as a set-and-forget strategy, says Boey.

The key to better returns, he says, is being more active. That could mean taking a more hands-on, agile approach to your own portfolio, or investing in a managed portfolio. 

How to manage the current market

One of the challenges facing multi-asset or 60/40 investors right now is finding real risk-based diversification. As Boey points out, inflation and other macro factors mean major asset classes are increasingly correlated. 

"The good news is that there are ways to hedge against heightened correlation risk, especially if central banks are talking hawkishly about rates," said Boey. 

"One of the ways of doing this is to shorten the duration of the equity portfolio, so that it is not as correlated with long-duration bonds. This means taking more of an income or value tilt rather than a growth tilt."

Given how well many equities markets have performed recently, it seems counterintuitive to view the equities portion of a mixed portfolio as the stabiliser, but the current environment in Australia lends itself to that approach, Boey says. 

"Coincidentally, CGT changes in Australia also favour income and value over growth, but clearly, we need to apply a quality overlay to stock selection as well, given that the current policy mix will likely slow economic growth."

Where WAM has found returns

One of the upsides of the dynamic, volatile market that has established itself in recent years is that there's now no shortage of opportunities across both equities and fixed income. 

Boey co-manages the WAM Income Maximiser portfolio (ASX: WMX), which returned 19.2% in FY26, beating its blended 60/40 benchmark by 13.4%. 

Significantly, it delivered this return with 17.1% less volatility than the S&P/ASX 300 Accumulation Index.

While it isn't a classic 60/40 portfolio, given it has the ability to move asset allocation, it operates from a similar philosophy and is benchmarked against a 60/40 portfolio. 

The key to its performance has been taking a highly active approach to the shifting conditions and market shocks that have characterised the last 12 months, says Boey.

"In our debt portfolio, for 2H 2025, we were short duration and willing to take on more credit risk," he said. "But in 1H 2026, we have switched to a long duration position and higher quality bonds." 

"In our equity portfolio, we have been long resources and growth stocks for much of 2025, but have since taken profits, and rotated more towards real estate investment trusts." 

At a time where things are so finely-poised, being active has enabled WAM to respond effectively and decisively as conditions changed.  

"In terms of asset allocation, we have been generally running equities at or above benchmark over the past year on strategic horizons, recognising that there has been plenty of uncertainty, but not to the point of breaking the plumbing of the global financial system," Boey said. 

"But we have been able to use our portfolio overlays to expediently manage equity beta during shocks like the Middle Eastern conflict."

And with uncertainty likely to remain a dominant theme in markets over the next 12 months, investors need to be positioned appropriately, says Boey. 

"Reducing volatility is critical at the best of times, but especially so now." 

While equities and bonds remain more correlated than usual, there are still ways to mitigate the risk of a broader downturn. 

"A lot of the upside in markets rests on low interest rate risk in a secure financial plumbing environment," said Boey. "If interest rate or funding risk rises, we can see drawdowns across many different types of investments."

"We can reduce volatility by investing in lower risk assets, or by investing in combinations of assets that have zero to negative correlation."

And it's in moments like this where having additional strings to their bow can help active managers outperform in a way passively-minded investors may not. 

"During these times, we need to be able to actively manage risk using many different levers, such as stock selection, duration, credit and asset allocation dimensions."

What could deliver in FY27

Those levers should continue to come in handy over the next 12 months, where investors will have to contend with lingering questions around equities valuations and monetary policy decisions. 

On the fixed income side, Boey says that it's hard to look past the strong yields on offer in corporate debt.

"We think that long-duration, fixed rate, major bank debt is very attractive, offering yields above 6.5% per annum."

On the equities side, WAM is backing income stocks like Amcor (ASX: AMC), Stockland (ASX: SGP) and Mirvac Group (ASX: MGR), which could offer a mix of growth and income. 

And ultimately it's striking the right balance between the two that will, as always, determine the outcomes for investors. Current conditions may be leaning in favour of income over growth, but the situation remains fluid, says Boey. 

"There should be more of a focus on income investing relative to growth investing from the tax changes and the phasing out of bank hybrids, but at the end of the day we will reset relative pricing for changes in the demand and supply of income-producing assets and then have to move on."

Boey is naturally backing active management, but the key takeaway is that passive approaches may no longer cut the mustard.  

"Active management will be needed to navigate this journey. We can see a strong case for active bond-equity portfolios – but passive portfolios are likely to struggle."

The reality for investors has changed. A classic 60/40 portfolio no longer makes sense for modern markets. Thankfully, it's likely evolution and not revolution that's required. 

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