Morgan Stanley IM: When Is a Portfolio Efficient Enough? Evaluating Alternative Betas

Now that this 40-year trend of declining interest rates has ended — and rather abruptly — investors are struggling to find ways to create an efficient portfolio with more stable returns. Why? Well, it appears that bonds may no longer provide the portfolio ballast that they have for the past decade and the traditional 60/40 portfolio1 might no longer work as expected.

So, where do we go to find a solution? Back to the 1950s and 60s, when this very issue was really first analyzed in depth. Before that, and ever since serious investing began (for reference, the first stock market was formed in Amsterdam in 1611; the NYSE started in 1792) investors understood there was a relationship between risk and return. But, investors lacked ways to both reliably measure and manage risk and incorporate this uncertainty into the valuation of an investment portfolio.

Enter Harry Markowitz in 1952, who had the insight to measure and manage portfolio risks by holding imperfectly correlated assets together in a portfolio. He illustrated that lower correlations between assets had the net effect of canceling some — but not all — of the associated risks within a portfolio. These lower correlations, where assets would not move together in lockstep, helped reduce the variance of returns over time.

^{IMPORTANT INFORMATION}

^{The views and opinions are those of the authors as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”), and may not be reflected in all the strategies and products that the Firm offers.}

^{This material is for the benefit of persons whom the Firm reasonably believes it is permitted to communicate to and should not be forwarded to any other person without the consent of the Firm. It is not addressed to any other person and may not be used by them for any purpose whatsoever. It expresses no views as to the suitability of the investments described herein to the individual circumstances of any recipient or otherwise. It is the responsibility of every person reading this material to fully observe the laws of any relevant country, including obtaining any governmental or other consent which may be required or observing any other formality which needs to be observed in that country.}

^{This material is a general communication, which is not impartial, is for informational and educational purposes only, not a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. Information does not address financial objectives, situation or specific needs of individual investors.}

^{Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.}

^{Prior to making any investment decision, investors should carefully review the strategy’s / product’s relevant offering document. For the complete content and important disclosures, refer to the link above.}