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Why -- and How -- S&P Allocates

Every week, The Outlook prints Standard & Poor's current asset allocation advice. The benchmark to which that advice can be compared consists of 60% stocks, 40% fixed-income. Why?

We undertook an analysis of different portfolio mixes, from 100% bond to 100% stock. That analysis showed the best risk/return characteristics come with a 60% stock/40% bond split.

To measure our performance, we set up a benchmark consisting of the S&P 1500 composite index (45%), the MSCI EAFE index (15%), the Lehman U.S. aggregate bond index (30%), and the Lehman three-month Treasury bill index (10%).

The reason the S&P Investment Policy Committee recommends allocations that differ from the benchmark is to offer value by factoring in the current investment climate. We currently recommend a 65% exposure to equities because we believe the continued increase in short-term rates will adversely affect the return of bonds (though we expect the Fed to stop raising rates at the May meeting). What's more, since we believe the U.S. dollar will weaken against foreign currencies after the Fed ends its rate hike program, we believe international equities will benefit.

S&P launched its Model ETF Portfolio in November 2004. The components are available at From November 14, 2004 through January 31, 2006, our allocation gained 12% vs. a 10.8% advance for the benchmark. Is this allocation optimal for everyone? Not necessarily. The selection of the most appropriate allocation is subjective, based on one's risk tolerance profile and time horizon.

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