60/40 isn't dead but it isn't enough, and when stocks and bonds fall together as in 2022, systematic trend investing offers crisis alpha that traditional diversification can no longer guarantee.

The 60/40 portfolio (60 per cent equities, 40 per cent bonds) was the bedrock of portfolio construction for half a century. Then it delivered its worst calendar year since the Great Depression in 2022. Both asset classes fell simultaneously. The supposed ballast of the bond sleeve offered no protection at all.

The debate that followed has mostly centred on whether 60/40 is dead. That is the wrong question.

The 60/40 framework was built around a specific set of macroeconomic assumptions. Inflation would remain contained. Interest rates would drift lower over time. When equities fell, it would be in response to slowing growth. Central banks would cut rates. Bond prices would rise. Equities and bonds would move in opposite directions when it mattered most.

Inflation has evolved. Consider the current environment. The US-Iran conflict and the surge in oil prices have driven bonds and equities lower at the same time. Buying bonds for risk off is no longer simple portfolio protection. The diversification benefit that looked compelling in normal markets has become far less reliable in the moments it is needed most.

The response to these limitations has been to diversify further and add more asset classes: private equity, private credit, real assets, infrastructure, to portfolio allocations. For many investors, these additions make sense as sources of return diversification over a long horizon.

But they do not solve the specific problem that 60/40 has. Most of them are not designed to perform during sustained periods of market stress. A number of them add breadth, not protection.

This is where systematic trend investing strategies deserve more serious consideration in portfolio construction discussions.

Trend investing harnesses the fact that markets that have been moving in one direction tend to continue doing so for a period, giving rise to the adage that 'trend can be your friend'. This can be across equities, fixed income, commodities and currencies.

During the equity market dislocations of 2000 to 2002, 2008, and 2022, systematic trend investing strategies have historically tended to generate strongly positive returns, consistent with published academic findings that trend investing delivered positive returns in eight of the ten largest global market crises over the past century. These strategies tend to be most valuable precisely when traditional portfolios are most stressed. Practitioners call it crisis alpha: not just low correlation in normal times, but genuine positive performance when conditions deteriorate most sharply.

The case for inclusion

Decades of academic research have demonstrated that adding a systematic trend investing allocation to a traditional portfolio has historically improved risk-adjusted returns, reduced maximum drawdowns, and provided genuine diversification that survives stress testing. This includes a study published in the Journal of Financial Economics on time-series momentum and research published in the Journal of Portfolio Management on a century of trend investing returns.

Beyond its defensive characteristics, trend investing has also demonstrated the capacity to generate strong standalone returns across a full range of market conditions, not just during periods of crisis. The same academic literature that documents its crisis alpha also shows positive average returns in each decade since 1880, across expansions and contractions, high- and low-inflation regimes, and rising and falling rate environments. For allocators, this reframes the conversation: trend investing is not simply a hedge to be tolerated for its diversification benefit, but a return stream capable of standing on its own within a portfolio.

That said, trend investing strategies can experience periods of flat or negative performance when markets are range-bound or subject to sharp reversals. The same is true of bonds in an inflationary environment. The question is whether its underperformance is correlated or uncorrelated with the rest of the portfolio. For systematic trend investing, the evidence consistently suggests the latter.

The incomplete portfolio

The 60/40 portfolio is not broken. It continues to do what it was designed to do, in the conditions it was designed for. The problem is that investors have come to expect it to work in all conditions.

A portfolio genuinely prepared for the full range of macroeconomic environments needs something that 60/40 does not contain. Not more of the same return streams in different wrappers. Rather, a genuine alternative strategy positioned to benefit from the kinds of sustained, directional moves that accompany the most difficult periods for traditional assets.

The conversation has been dominated for too long by whether 60/40 is dead. The more productive question is what belongs alongside it.

Trend investing

Trend investing, often called 'trend following' or 'momentum investing', doesn't attempt to predict markets. It is about identifying what markets are 'actually doing', rather than trying to predict what they 'might do'.

It focuses on buying assets that are moving up in price, and selling when they turn and start moving down. Instead of looking at an individual company's finances and prospects, it ignores earnings calls, balance sheets and stock-picking entirely. It focuses instead on identifying existing market trends and capturing rises that continue for a period of time, using a range of technical indicators, such as moving averages and breakout channels, to gauge price direction and momentum.

It uses systems, quantitative and rules-based processes to provide risk-adjusted diversification and low correlation with traditional investments, trading across diverse global markets and asset classes.

For example, East Coast Capital Management maintains a diversified, liquid portfolio of over 90 international futures markets, spanning commodities, currencies, equity indices and fixed income across geographically diverse markets, a genuinely different set of return drivers to a standard balanced portfolio as well as to most 'alternatives'.

This article was published by Investor Daily and was authored by ECCM's CEO, Simone Haslinger.

It doesn't matter which BBQ you're at this weekend; house prices will invariably make their way into the conversation. But what we're watching is the impact of falling house prices beyond the headlines. Drawing on analysis by Challenger Chief Economist Jonathan Kearns, our central case for Australian house prices is for a cumulative decline of around 10%, with the clearest economic effect likely to be weaker discretionary consumption. While a correction of this magnitude should not, by itself, materially impair mortgage credit, it is likely to reshape the market through lower origination volumes, stronger competition and changes in lender behaviour, with different implications for major banks, non-bank lenders and RMBS investors. 

Housing is correcting, but tight supply limits the downside

National house prices have fallen in the past few months and by now would be close to 5% below their March peak. The correction is large but has not been uniform; houses have fallen more than apartments, capital cities have underperformed regional markets, auction clearance rates are at their lowest in six years and banks report that housing-loan applications have declined by 15 to 20%. 

Higher interest rates are the primary driver here. Price growth began to slow when cash-rate expectations turned in October last year, consistent with previous housing cycles. The strong run-up in prices before the March 2026 peak also left the market more susceptible to a correction. Changes to capital gains tax and negative gearing have added to the weakness but are not the principal cause. 

A materially larger decline is not our central case, principally because housing supply remains constrained. Rental vacancy rates are only a little above 1.5% nationally and below 2% in every major city, while construction continues to fall short of underlying demand and the Government's target of 1.2 million new homes over five years. Our central case is therefore a meaningful correction, not a housing collapse. The distinction matters because weaker prices can affect household spending and reshape mortgage markets without necessarily producing material credit losses. 

The clearest economic effect will be on consumption 

Under our central case, Jonathan Kearns' analysis indicates that the decline in house prices could reduce consumption by 1 to 2% over a 18 to 24 month period, equivalent to a reduction in annual spending of 3 to 6 cents for each dollar of lost housing wealth. The effect is likely to be concentrated in discretionary categories, including vehicle purchases, furnishings, recreation and hospitality. 

Several channels connect house prices to consumption. Lower perceived wealth can reduce spending, diminished housing equity can constrain borrowing, and greater uncertainty may encourage precautionary saving. Lower property turnover also reduces expenditure on furnishings, renovations and other transaction-related purchases, a channel the RBA has highlighted as particularly important in Australia. 

The estimates use differences in house-price movements across states to isolate the effect of housing wealth from common influences such as interest rates and income. For investors, the immediate implication is therefore weaker consumer demand. Whether the same correction materially affects mortgage-credit performance depends on borrower resilience, lender behaviour and the severity of the downside scenario.  

Because much of the correction reflects the intended transmission of tighter monetary policy, the resulting weakness in consumption would not, by itself, justify monetary easing. 

A severe fall would be painful, but is not our central case 

Tight housing supply and the relatively moderate increase in the cash rate should limit the downside. Nevertheless, a severe external shock could amplify the correction, so we also consider a 25% national decline. 

Falls of that magnitude are rare and, unlike equity-market corrections, have historically unfolded over several years. Recent examples include the 27% decline in Darwin from 2014 and the 26% decline in US national house prices over five years during the Global Financial Crisis. 

Our analysis suggests that a nationwide 25% fall would leave around one-quarter of households owning a property worth less than its purchase price. That is not the same as negative equity. Most buyers contribute a deposit, subsequently repay principal and, depending on when they purchased, may have benefited from earlier price growth. 

Consistent with that distinction, the RBA has estimated that a 20% house-price fall would leave only 5% of loans in negative equity. APRA stress tests incorporating 30% to 40% house-price declines produced higher mortgage losses and lower bank profitability, but banks remained above minimum capital requirements even without corrective action. 

The key lesson is that a severe decline in house prices would not translate mechanically into equivalent mortgage-credit losses. The nature of the shock, particularly its effect on employment, borrower income and repayment capacity, would matter more than the change in collateral values in isolation. 

For banks, watch earnings before asset quality 

Under our central case, the housing correction is more relevant to bank earnings and equity valuations than to ratings or senior-credit risk. Unemployment that remains historically low is the most important support for borrower repayment capacity, while accumulated equity, serviceability buffers and payments in advance provide additional protection. 

Melbourne provides a useful reference point. House prices peaked there in March 2022 and have subsequently underperformed the national market, yet the deterioration in mortgage and consumer-credit quality that might have been expected has not emerged. This does not guarantee the same outcome elsewhere, but it supports the view that falling prices alone need not produce material bank losses. 

The more immediate effects for the major banks are therefore lower investor housing-loan volumes and greater competition for a slower-growing mortgage pool, maintaining pressure on asset margins. Business-credit growth of 10% year on year is providing some offset, but we are also watching whether mortgage competition encourages the major banks to widen their credit appetite and move further into the near-prime customer base currently served by non-bank lenders. 

For non-banks, the impact is yet to be fully felt 

Changes to capital gains tax and negative gearing, together with restrictions on residential property borrowing by SMSFs, are likely to reduce investment lending volumes materially. For non-bank mortgage lenders, the potential effect is significant given the contribution of investor and SMSF loans to historical originations. 

Based on our observations, loans secured by investment properties have historically represented 30% to 40% of originations for a typical non-bank mortgage lender, and SMSF lending a further 10% to 15%. On those numbers, a decline in total originations of 25% or more would not appear unreasonable, particularly if the major banks also widen their credit appetite. 

Except we are not seeing that. Or at least, not yet. Originations remained relatively healthy through August, partly reflecting an increase in SMSF lending ahead of the 10 August cut-off, with settlements continuing into September, and partly reflecting the long lead times inherent in property transactions. 

Non-bank lenders are preparing for the expected slowdown by considering products such as bridge loans, commercial property mortgages and construction finance. Most remain at an exploratory stage, but diversification may become a greater priority as the reduction in investor and SMSF originations becomes apparent. Moving beyond established areas of expertise could introduce additional credit and operational risk, making changes in product mix and underwriting standards important indicators for investors to monitor. 

Competition may also affect existing non-bank loan books through faster refinancing and prepayments. In 2021 and 2022, annualised prepayment speeds for non-bank lenders reached 50% to 60% as the major banks used low-cost RBA funding to compete aggressively for market share. A renewed widening of bank credit appetite could produce a similar effect. Lower housing turnover and diminished borrower equity may make some loans more sticky, but this will likely provide only a partial offset. 

Future investment-loan cohorts are also likely to look different. Reduced incentives to maximise leverage may result in lower LVRs and fewer interest-only loans, potentially reducing the incentive to refinance when an interest-only period expires. Favourable treatment for new construction may also increase the share of inner-city apartments and fringe-metro house-and-land packages within future pools. We expect each of these effects to emerge, although their magnitude and interaction remain uncertain. 

For RMBS investors, the credit impact is likely to be marginal 

Under our central case, a broad-based decline in property values should not pose a material credit risk to rated tranches in Australian RMBS transactions. Borrower equity and structural credit enhancement should provide substantial protection under this scenario, although outcomes will vary with pool leverage, seasoning, borrower composition and geographic concentration. 

The conclusion is more nuanced under the 25% downside scenario. A severe correction accompanied by materially higher unemployment would place greater pressure on borrower income and repayment capacity, while elevated business insolvencies could be particularly relevant to pools with greater exposure to self-employed borrowers. The cohorts requiring closer analysis would be loans combining high current LVRs with more income-sensitive borrowers, limited seasoning or concentrations in locations experiencing larger price declines. 

Even then, the effect on an RMBS investor ultimately depends on the protection available to each tranche. Assessing the interaction between collateral performance, structural credit enhancement and the tranche's position in the capital structure is more informative than applying a single national house-price decline uniformly across the market. 

What we're watching 

Our central case is that the housing correction weakens discretionary consumption and reshapes mortgage markets without materially impairing mortgage-credit performance. We expect the immediate effects to be felt through lower origination volumes, stronger competition and changes in lender behaviour, rather than material losses for major banks or RMBS investors. 

We are watching for a more significant deterioration in employment, arrears and business conditions, as well as evidence that competitive pressure is weakening underwriting standards or pushing lenders beyond their established areas of expertise. Until then, falling house prices are changing the mortgage market, but are not yet a material credit event.