A 60/40 for European families, revisited

The currency bet nobody chose

Currency is the largest and least examined risk in a European 60/40. A developed-market equity index is roughly 60-65% US by weight, with most of the remainder in other non-euro currencies and the euro share often below 15%. Left unhedged, an equity sleeve of 60% therefore embeds close to 45-50 points of net non-euro currency exposure, comparable in scale to the equity decision itself.

Over very long horizons, currency exposure on a diversified equity book adds volatility without a reliable risk premium; there is no durable reason to expect the dollar to compensate a euro investor for holding it. Nor is the euro-dollar rate a dependable safe-haven hedge: in several recent equity drawdowns the dollar rose, flattering unhedged euro returns, but in others it did not, and a family cannot bank on a correlation that flips with the nature of the shock. Treating the currency as a free diversifier is the error most templates make.

Our preference is to hedge the bulk of the developed-market equity currency exposure back to euro, while accepting that hedging is neither costless nor always advantageous. The dollar-euro interest-rate differential is currently positive for a euro investor hedging the dollar, so the carry is, for once, a modest tailwind rather than a drag. We would not hedge emerging-market currency, where the cost is high and the exposure is part of the asset class, and we would size the hedge to the family's actual euro liabilities rather than mechanically to par.

Duration is a choice, not a default

The defensive sleeve deserves the same scrutiny. A dollar 60/40 leans on US Treasuries because they are the deepest, most liquid risk-free asset in the world and are denominated in the investor's own currency. A euro investor who buys the same Treasuries is making two decisions at once: a duration decision and a sovereign-issuer decision, both of which should be taken deliberately from a euro base.

On the issuer question, the natural anchor for a euro family is core euro-area government debt, principally German Bunds and, where appropriate, French and Dutch paper, supplemented by the highest-quality euro corporate and supranational issuance. These match the currency of the family's liabilities and remove the residual basis risk that hedged Treasuries carry. The euro-area sovereign market is liquid enough to build a high-quality defensive sleeve without US paper, with peripheral spread held only as a satellite.

On duration, 2022 taught an expensive lesson that applies regardless of currency: long-duration bonds are not a safe asset when the shock is an inflation or rate shock rather than a growth shock, because the bond leg falls alongside equities. With the front end of the euro curve now offering a positive real yield after a decade of financial repression, a euro investor need not extend to long maturities to earn a return from the defensive sleeve. We favour an intermediate duration, broadly four-to-seven years, capturing most of the term premium while limiting the drawdown if rates move against the position.

Home bias, rightly understood

Home bias has a poor reputation in portfolio theory, deservedly so when it means a family holding 80% domestic equities out of familiarity. But there is a legitimate version that follows directly from the currency argument: a euro investor whose liabilities are in euro has a real reason to hold somewhat more in euro-denominated and euro-economy exposure than a global market-cap index would suggest. The objective is to match assets to liabilities, not to express patriotism.

In practice this means a measured tilt toward European equities beyond their index weight, and toward euro real assets, particularly listed real estate and infrastructure, whose cash flows are substantially euro-denominated and often inflation-linked. We would frame this as perhaps five to ten points relative to global market-cap weights, not a wholesale reweighting. The European market is also more value-tilted and less concentrated in mega-cap technology than the US, a diversifying characteristic when US index concentration sits at multi-decade highs.

The counter-argument is strong and must be granted its weight. The US market has materially outperformed Europe for over a decade, it is home to the companies driving the most important secular growth themes, and a euro investor who tilts toward Europe and hedges the dollar gives up exposure to both that outperformance and a currency that has often helped during sell-offs. These are reasons to retain a substantial, hedged US allocation, not to import an unexamined dollar bet; the tilt we describe is a correction at the margin, not a forecast that Europe will outperform.

Reassembling the portfolio from a euro base

Putting the corrections together yields a recognisable but meaningfully different portfolio. The 60% growth sleeve retains broad global equity exposure with most developed-market currency risk hedged to euro, a modest tilt toward European equities and euro real assets, and a small structural allocation to diversifiers of the equity-bond pair such as gold. The 40% defensive sleeve is anchored in core euro-area sovereigns of intermediate duration and high-quality euro credit, rather than in hedged or unhedged Treasuries. None of this is exotic: every building block is liquid, transparent and available through conventional instruments.

The corrections add cost in two places clients should understand plainly: the ongoing cost of the currency hedge, small at present but real, and the tracking error against the dollar 60/40 benchmarks the financial press will continue to quote. A euro investor who has corrected the template will sometimes lag the headline number, particularly when the dollar is rising; that is the price of removing a risk never paid for. The honest case for the rebuilt 60/40 is not that it earns more but that it gives a European family a portfolio whose risks are the ones they intend to hold, measured in the currency they actually spend.

What this means for clients

First, audit the currency exposure of your existing balanced portfolio. Most European families discover that their largest single market risk is not their equity selection but their unhedged dollar exposure, and that it was never a deliberate decision. Measure it, then decide with your adviser how much to keep; our default is to hedge the majority of developed-market equity currency risk back to euro while retaining a deliberate, sized residual.

Second, treat the defensive sleeve as a euro decision in its own right. Core euro-area government bonds of intermediate duration are a more coherent anchor for a euro family than US Treasuries, and the positive real yields now available across the front and middle of the curve mean the sleeve can do its job without the drawdown risk of long duration.

Third, allow a measured home bias toward euro-denominated equities and real assets, justified by where you spend rather than where you live, kept modest enough to remain a correction rather than a concentrated bet. Retain a substantial, hedged US allocation alongside it; the aim is to own the world from a euro base, not to retreat from it. This is house research from the Multi-Asset desk and not personalised advice: the appropriate size of each correction depends on a family's circumstances, to be discussed with their adviser.