The 60/40 portfolio was built on a simple premise: equities drive long-term returns while bonds provide stability and diversification. But that relationship is no longer as reliable as it once appeared. Inflation, higher interest rates and shifting macroeconomic regimes have shown that correlations can change precisely when investors need diversification most. For institutional investors, the challenge is therefore to move beyond asset-class labels and consider how exposures interact across the portfolio. Sweden’s AP3 offers one example. CIO Jonas Thulin has championed a Total Portfolio Approach that combines strategic asset allocation with tactical positioning, quantitative signals and a broader focus on portfolio-level risk and return.
Thulin is blunt in his assessment of the traditional 60/40 model. “As history has taught us, especially over the last five years, a 60/40 portfolio provides no diversification,” says Thulin. In his view, the model may still have relevance in academia and research, where correlations can be treated within defined historical windows. “As soon as we go into the real world, where correlations change across different time horizons, the 60/40 portfolio is no longer relevant. It has run its course.”
“As soon as we go into the real world, where correlations change across different time horizons, the 60/40 portfolio is no longer relevant. It has run its course.”
Jonas Thulin, CIO at AP3.
For Thulin, the problem goes beyond the changing correlation between equities and bonds. He also questions the mechanics of maintaining a portfolio built around fixed asset-class weights, particularly the requirement to rebalance at predetermined intervals. For a large institutional investor, those trades can become predictable and potentially costly. “If you run a 60/40 portfolio the size of an AP fund, everybody will know when you rebalance, and they will front-run you. You’re fighting the market and widening spreads as soon as you want to do something.”
From automatic rebalancing to dynamic allocation
This thinking was one of the reasons Thulin moved AP3 towards a Total Portfolio Approach and dynamic asset allocation after taking over the portfolio management role. One of his first decisions as CIO was to remove the automatic rebalancing exercises that had previously taken place every month.
“We want to achieve as high a return as possible given our mandate and our role in Swedish society, obviously under controlled and predetermined risk.”
Jonas Thulin, CIO at AP3.
“If I as a CIO am half-good at timing the market and understanding what’s going to happen, I will outperform an automatic rebalancing scheme,” says Thulin. AP3 made the decision to employ the Total Portfolio Approach and focus on the total return. “We want to achieve as high a return as possible given our mandate and our role in Swedish society, obviously under controlled and predetermined risk,” he explains. “We can maximize that return more easily if we work dynamically with the portfolio.”
Strategic allocation as a set of guardrails
At AP3, the strategic asset allocation remains an important part of the investment process, particularly through the fund’s asset-liability and broader societal considerations. “For us, the strategic asset allocation remains important through the ALM calculations,” explains Thulin. AP3 does not have conventional liabilities in the same way as a corporate pension scheme, but the fund has what he describes as a “liability to society,” the requirement to generate sufficient long-term returns for the Swedish pension system.
Pension funds such as AP3 must take broader demographic and economic factors into account, including the country’s birth and death rates, net immigration, tax revenues and future demographics. The strategic allocation exercise consequently establishes what Thulin calls a set of guardrails. AP3’s strategic capital allocation provides the broad parameters for the portfolio, including a reference point for equity exposure. AP3 currently has a benchmark allocation of around 55 percent to equities. “If we have 55 percent equities, we should make ends meet if nothing else happens,” says Thulin.
“How can I beat the 55 percent equities and 45 percent interest rates? Then we leave the strategic asset allocation behind, and all asset classes and investments compete with each other.”
Jonas Thulin, CIO at AP3.
The CIO’s role then becomes to determine whether the portfolio can improve on that strategic baseline. “How can I beat the 55 percent equities and 45 percent interest rates?” asks Thulin. “Then we leave the strategic asset allocation behind, and all asset classes and investments compete with each other,” he explains. “From a total portfolio approach, it’s about making sure we allocate capital to what is actually best for the overall portfolio.”
Combining strategic conviction with tactical signals
AP3 distinguishes between strategic and tactical changes, although both are informed by a broad range of quantitative models. Thulin says the fund typically makes around one major strategic shift a year, alongside roughly 50 tactical trades. One strategic shift in 2026 was the decision to reduce equity exposure ahead of the U.S. attack on Iran. Thulin describes the decision not as a single prediction of an impending geopolitical event, but as the result of a series of signals emerging across financial and macroeconomic data.
“We were out before the war began because of our signals,” he recalls. “We could see in the data that some part (later revealed that it was Iran) was starting to hoard financial capital and foreign exchange.” According to Thulin, the signals were visible in financial stress indicators before the conflict became widely reflected in market pricing. The example illustrates the distinction AP3 makes between reacting to an event and identifying the underlying conditions that precede it.
Data-driven decision-making and organizational control
The quantitative infrastructure behind these decisions is extensive. Thulin describes “thousands upon thousands of different models” contributing to different parts of the investment process, with some operating at a higher frequency for tactical decisions and others moving more slowly while looking further ahead. “It’s all data-driven,” he says. “We have to be able to derive and prove why we allocate or change an allocation, and we have to be accountable for those decisions. That means we can follow up, we can be transparent about what went well and what went badly, learn from it and move on.”
The distinction between strategic and tactical decisions is partly determined by the strength and persistence of the signals. Some models can move quickly into tactical positions, while strategic changes require a higher degree of confidence because they involve greater portfolio-level consequences. “When you build a model, you have to ask whether it should be used strategically or tactically. For a strategic shift, you slow down because you need to be certain the model is actually right. A strategic decision has much greater consequences and requires a lot more effort,” explains Thulin.
For AP3, however, a Total Portfolio Approach is not simply an investment philosophy or a matter of giving portfolio managers greater discretion. It requires an organizational infrastructure capable of monitoring and controlling the resulting portfolio.
Thulin rejects the idea of AP3 as a collection of portfolio managers making large bets independently. “What has worked really well for AP3 is the culture and also the, quote-unquote, middle and back office. We have the governance structure and the culture to make this work throughout the entire organization,” he says. The investment process therefore extends beyond the front office, with decisions and risks tracked across the organization.
“We often talk about the front office taking positions and timing the market because that’s the “cool” stuff. But equally important, if not more important, is control.”
Jonas Thulin, CIO at AP3.
That infrastructure allows AP3 to monitor the entire portfolio on an hourly basis and understand how positions affect aggregate risk. For Thulin, this is a critical, and sometimes overlooked, component of moving from a traditional strategic asset allocation framework towards a Total Portfolio Approach.
“Without that whole machinery behind it, we won’t be able to run a Total Portfolio Approach,” he concludes. “We often talk about the front office taking positions and timing the market because that’s the “cool” stuff. But equally important, if not more important, is control. I can’t just run around taking positions worth billions without someone looking at every step I take and making sure I stay within my guardrails and am stopped out when necessary.”
This article is part of HedgeNordic’s “Rethinking the 60/40 Portfolio” publication.
