Morgan Stanley opts for a 60/20/20 in place of a 60/40

S2N Spotlight

There has been a lot of talk in investment circles, with Morgan Stanley’s CIO coming out in favour of a 60/20/20 portfolio strategy with gold as a hedge.

Here is a comparison chart of a 60/40 portfolio with an equity S&P 500 benchmark. As you can see, it dramatically underperforms the S&P 500 Total Return index but has smaller drawdowns.

The performance numbers look like this. We all think we would stay the course with a 50% drawdown; in practice, very few do. If you are one of the few, you would have done better sticking with the index and extra pair of underpants.

Let us take a closer look at how the Morgan Stanley 60/20/20 (S&P500,Bonds,Gold) portfolio has fared over the decades. It still underperforms the benchmark, but the numbers are really interesting. It seems like a no-brainer to move away from the 60/40; one needs to ask the question why the CIO is only making the move now.

The risk-adjusted return for the 60/20/20 portfolio is extremely compelling.

Here is a look at how the 3 different assets contributed to the portfolio.

Before you slate bonds as a waste of time, they produced the highest Sharpe Ratio with 2.49, so they have an important place in a portfolio. The table below is not easy to understand at first glance. I have spent a lot of time trying to get this to be highly informative. What you can see is that the individual return for each asset was better if you simply invested all your funds in it versus applying a portfolio weighting. However, the benefit comes at the portfolio level, where the portfolio composition outperforms an equal weighted allocation of 1/3 of the capital into each asset by 608%.

S2N observations

The S&P 500 continues to make new all-time highs. It is fascinating to see how the S&P 500 has performed when measured in real money (gold). We are still a long way from an ATH last seen during the dot-com bubble.

Gold is on track to having its biggest year in nearly 50 years.

At the same time, the US dollar is having one of its weakest years.

I have been spending countless hours working with and thinking about AI. I believe this technology is a game changer and will have a dramatic impact on society, both positive and negative.

I also believe, like Sam Altman, the CEO of OpenAI, and Bret Taylor, the Chairman of OpenAI, that we are in a giant AI bubble. I didn’t make that up; both are on the record making such statements. For those of you who were investors during the internet bubble, Henry Blodget is a name you should recall. He was probably one of the highest-profile analysts covering internet stocks. Last week he put out a newsletter emphasising how big a bubble the current AI bubble is.

“Early investors and entrepreneurs made colossal fortunes on Internet investments from 1994 to 2000. If they held on past 2000, however, most of them lost most of their gains. Out of hundreds of Internet companies that went public from 1994 to 2001, only a handful ever regained their bubble highs. Only one Internet company I can think of—ONE—has delivered a compelling long-term return from its bubble peak: Amazon.”

I was stunned when reading that OpenAI is expected to lose between $8 and $9 billion in 2025 and could see losses rise to as much as $14 billion by 2026, with cash burn and planned investment ramping up sharply over the coming years. The company is planning to spend over $8 billion this year (2025), more than doubling to about $17 billion in 2026, with forecasts reaching $35-45 billion in annual spending by 2027-2028 as it invests massively in data centres and AI infrastructure.

Think about those losses. They already have 750 million users, and the competition is getting stiffer. Increasing profitability to give investors a return on their money is not going to be easy. Stock market valuations now are almost completely being driven by AI mania.

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The Dow Jones South African Index has gone up 11 days in a row; this has happened 5 times in 27 years.

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