There is a fascinating concept in Major League Baseball where, during warm-ups, the players do something called “fake hustle.” When running, they swing their arms faster than normal and over-exaggerate their leg movements but do not actually run any faster. From a distance, the coaches believe the players are hustling and giving 100%, but in reality, they are faking it. We all know the players are not doing themselves any favors by only “simulating” full effort in practice. In fact, it could be argued they are actively sabotaging their team by not putting in the hard work needed to be successful when it counts.
You may have been there, just think back to high school or college. A full semester of preparation, clearly assigned reading and frequent lectures along with pop quizzes when you least expect it to help prepare you for the final exam. If you actually complete the reading, pay attention in class, and take the quizzes seriously, completing the exam can feel like filling out a form. You know all the answers; you simply fill them in. However, if you bagged the reading, slept through class, and took a peek across the aisle during quizzes, the “fake hustle” catches up with you at the final exam.
The concept of the “fake hustle” also rings equally true in any business. Sticking with baseball, as the great George Costanza explained to Jerry and Elaine regarding his job with the New York Yankees – “if you always look annoyed, people will assume you’re busy and leave you alone.” But after a period of time, it becomes apparent to management who is producing and who is not.
Investment consulting deals with its own “fake hustle” issues. Simply going through the motions during client meetings or bringing investment ideas to the table that do not align with the client’s short- or long-term investment objectives, simply to give the appearance of adding value and/or being active is a “fake hustle.” True value-added consulting comes from full engagement with the client through an ongoing consideration of their evolving objectives and risk tolerance. This isn’t a recipe for constant portfolio tinkering, in fact, sometimes it takes more strength and conviction to simply stay the course. In other words, do not move the eggs from one basket to another just to prove to the client you are handling the eggs. Portfolio shifts should only be made to provide protection or add value/benefit. Motion for the sake of motion is just a “fake hustle” no matter the context in which it occurs.
Texas Association of Public Employee Retirement Systems
28th Annual Conference
Hilton Austin – Austin, TX
April 9 – 12, 2017
The quote above is from a recently trending “phrases of the 80’s” hashtag (#) on Twitter that made me chuckle. Like many others, this expression belongs in the annals of history as one you’ll probably never hear again. As a teen of the 80’s, I spent many of my formative years hanging out at the mall with perfectly feathered hair (not necessarily a mullet) wearing a blue and gray paneled, stonewashed jean jacket that would have made Marty McFly jealous. Looking back, you could call it loitering since we rarely bought anything, but that’s a completely different blog. All you have to do to relive these memories, or experience the awe-inspiring grandeur for the first time for young folks, is to Netflix (yes, it’s a verb now) an 80’s classic like “Fast Times at Ridgemont High” or “Weird Science” to see the importance the mall once represented in American pop culture. Long before we all carried the world in our pockets and became reachable regardless of time or location, the mall was the place to be and the place to be seen. Hanging out with your friends required planning, effort and physical proximity.
While they still exist in many forms, malls are just not the places of cultural significance they once were. In fact, there are some downright depressing real estate “shells” spread across the country – now mere shadows of the mainstay they once represented in our lives and a painful reminder of just how old I am. Unfortunately, time trudges on with or without “Orange Julius” in my life and that means 3D-printing items at home is more likely than an evolution of the centralized shopping mall.
The demise of the mall made me reflect on a financial axiom that has been repeatedly written off as a dead relic of the past, the 60/40 stock and bond portfolio. Truly elegant in its simplicity, the origin of this portfolio concept is basic math. If stocks return an average of 10% annually and bonds return an average of 5%, a 60/40 mix of these assets will earn an average of 8% per year. While it’s true that the latest 8-year run in equity markets has created elevated equity valuations and the 30+ year secular decline in interest rates appear to be at an end, opportunities in equity and bond markets are not permanently impaired. In fact, I would argue over time that public equity markets remain the greatest liquid source of long-term, economically sensitive portfolio growth, and investment grade bonds will continue to play an ongoing “anchor” role in fully-diversified portfolios.
What keeps the 60/40 stock and bond concept viable in a portfolio context is something a brick and mortar mall could never accomplish: its ability to adapt and evolve to opportunities and trends in the marketplace. This elasticity essentially broadens the historical definition of what “60% stocks” and “40% bonds” represent in modern portfolios. For example, “60% stocks” has meant much more than a simple investment in the S&P 500 for some time. The modern definition of “stocks” (equity and equivalents) includes a healthy weighting to non-U.S. investments across a broad spectrum of capitalizations, and increasing allocations to a wide menu of private equity opportunities. The definition of “40% bonds” has arguably been even more liberally characterized beyond its investment grade roots. “Bonds” have grown to encapsulate securities of various credit quality, country, currency, and structural complexity as well as characteristic and proxy-based allocations to private real estate and an ever-expanding universe of private credit opportunities.
Although it is fruitless to argue any asset mix’s near-term prospect for earning a set level of return in a volatile and uncertain world, dooming the pursuit of a flexible 60/40 portfolio to guaranteed failure is a rather rigid and ill-advised view of portfolio design possibilities. While uttering 80’s catchphrases and hanging out all day at the mall may be relics of the past (the jury is still out on a comeback for “stonewashed” fashion), the more liberally defined, fully-diversified 60/40 mix remains alive and well as a solid, foundational framework for developing long-term asset allocation strategies. From our viewpoint, while rougher waters may lie ahead for capital markets, a dynamically structured 60/40 portfolio has the adaptability to navigate the storm.