The traditional 60/40 portfolio has served investors reasonably well for decades — but Toby Watson argues that a changing world demands a broader and more sophisticated set of tools.
For most of the post-war period, a portfolio of equities and bonds was sufficient to meet most investors’ long-term objectives. That formula is under pressure. Rising correlations between traditional asset classes, a more complex macro environment and the availability of a far wider range of investment strategies have all changed the calculus. The career of Toby Watson at Goldman Sachs International — spanning structured credit, hard asset lending and principal funding across multiple market cycles — gave him an unusually broad appreciation of what the full investment toolkit can offer, and when each tool is genuinely useful.
aThe role of alternative assets in long-term portfolio construction has evolved considerably over the past two decades — shifting from a niche consideration to a central feature of sophisticated investment management. Toby Watson, a partner at Rampart Capital, has observed and contributed to this evolution from a position of unusual vantage. His decades of experience in institutional finance give him both the analytical framework to assess alternative strategies rigorously and the practical knowledge to understand how they behave in real market conditions, including the stress scenarios that reveal their true characteristics. It is a depth of perspective that few independent investment professionals can match.
Why the Traditional Portfolio Model Is No Longer Enough
The 60/40 portfolio — sixty per cent equities, forty per cent bonds — became the default framework for institutional and private investors alike for a simple reason: it worked. Equities provided long-term growth; bonds provided income and acted as a counterweight when equity markets fell. For much of the post-war period, the negative correlation between the two asset classes made the combination genuinely effective.
That relationship has become less reliable. The most striking illustration came in 2022, when both equities and bonds fell simultaneously — a combination that the 60/40 framework is specifically designed to avoid. For Toby Watson, this was a confirmation of something he had long observed in institutional finance: that apparent diversification can dissolve precisely when investors need it most?
For investors who lived through 2022, the lesson was uncomfortable but important. Toby Watson argues that genuine diversification requires more than splitting a portfolio between two asset classes that happened to be negatively correlated during a particular historical period. It requires understanding the underlying factors driving each investment — and ensuring that those factors are genuinely distinct.
What role do alternative assets play in a well-constructed portfolio?
Alternative assets serve several distinct functions in a portfolio, and Toby Watson is careful to distinguish between them rather than treating “alternatives” as a single homogeneous category. Some alternatives — such as certain hedge fund strategies or managed futures — provide genuine uncorrelated return streams that improve portfolio diversification. Others, such as private equity or infrastructure, offer access to return premia that are not available in public markets. Understanding which function a particular alternative strategy is serving, and whether it is fulfilling that function effectively, is the starting point for any rigorous assessment.
Toby Watson on the Main Categories of Alternative Investment
The universe of alternative assets is broad and heterogeneous, and Toby Watson’s approach is to assess each category on its own terms rather than applying blanket enthusiasm or scepticism.
- Private equity offers exposure to a different segment of the economy than public markets — one that includes businesses at earlier stages of development or in sectors that are underrepresented in listed indices. The return premium historically associated with private equity reflects a combination of illiquidity, operational value creation and, in some cases, leverage. Toby Watson’s time at Goldman Sachs International exposed him to private equity structures from multiple angles — as a lender, as a counterparty and as an analyst of credit risk — giving him a rounded understanding of where the return premium is genuine and where it is illusory.
- Infrastructure has attracted growing interest as an inflation-sensitive real asset with long-duration, contracted cash flows. For investors with long-time horizons and genuine tolerance for illiquidity, certain infrastructure investments can provide a useful combination of income and inflation linkage. Toby Watson notes that the key variables — regulatory frameworks, contract structures, political risk — require careful analysis rather than a blanket assumption that infrastructure equals stability.
- Hedge funds and liquid alternatives span an enormous range of strategies, from equity long/short to global macro to systematic trend-following. Their value in a portfolio depends almost entirely on the specific strategy, the quality of execution and whether the return stream is genuinely uncorrelated with the rest of the portfolio. The experience that Toby Watson gained at Goldman Sachs International, working alongside and across from some of the most sophisticated investors in global markets, gave him a realistic rather than idealised view of what these strategies can and cannot deliver.
The Liquidity Question
One of the most important and frequently underestimated dimensions of alternative investing is liquidity — or the lack of it. Toby Watson consistently emphasises that illiquidity is not simply a technical characteristic to be noted and filed away. It has real consequences:
- In a portfolio context, illiquid assets reduce the flexibility to respond to changing market conditions or client circumstances
- During periods of market stress, the inability to exit positions can force investors to sell liquid assets at unfavourable prices to meet cash needs
- The illiquidity premium — the additional return that investors theoretically receive for accepting reduced liquidity — is not always as reliable or as large as historical data suggests
This does not mean illiquid alternatives should be avoided — but it does mean that the appropriate allocation to them depends heavily on the investor’s specific circumstances, time horizon and liquidity requirements.
Building a Genuinely Diversified Toolkit
For Toby Watson, the evolution of the investment toolkit is ultimately about expanding the range of risk factors and return drivers that a portfolio can access — not simply adding complexity for its own sake. The most effective use of alternative assets is one that:
- Identifies specific gaps or weaknesses in a portfolio’s diversification profile and selects alternatives that genuinely address them
- Assesses each strategy’s behaviour under stress, not just in normal conditions
- Maintains an honest view of fees, liquidity constraints and the realistic range of outcomes — rather than relying on historical returns that may not be repeatable
That kind of disciplined, sceptical engagement with the alternative’s universe is precisely what experience in institutional finance prepares you for. It is the approach that Toby Watson brings to the question of how the evolving investment toolkit can best serve long-term investors — and one that reflects a career spent understanding not just how alternative strategies are supposed to work, but how they actually behave when conditions become difficult.
