Moving toward a new portfolio framework

December 2020

The discussions regarding the impact of low interest rates and what to do about them have been the focus of the Meketa Low Interest Rate (LIR) Working Group since March 2020. Contemporaneously, many clients have initiated their own discussions and research on this topic.

The potential impacts on funded status, return goals, discount rates, etc., are well explored. It is now, in our opinion, time to seek potential solutions. One approach is to structure portfolios in a manner that maximizes the risk/return characteristics for any given investor. Different investors have a range of return goals, and no one structure is universally appropriate. No matter the investor’s return objective, maximizing the efficiency of their portfolio may require looking at strategic asset allocation through a new lens.

This paper explores the barbell approach to asset allocation (described later) and how it can potentially mitigate some of the impacts of low interest rates on client portfolios. Please note that the barbell approach has pros and cons, and it may not be appropriate for all investors and situations (e.g., stagflation scenario).