Challenges encountered by the traditional 60/40 portfolio post-GFC and during the COVID-19 pandemic have revealed a breakdown in the stock-bond correlation when inflation reaches certain levels.
Speaking on a recent episode of the Relative Return podcast, Marian Paul highlighted that this breakdown of the 60/40 paradigm has catalysed a significant shift in investor preferences towards alternative investments as they seek diversification.
“For an extended period of time, the 60 40 portfolio has struggled to provide the risk-adjusted returns and diversification expected from the inverse correlation characteristics from these two asset classes,” Paul said.
UBS Global Wealth Management's model portfolio has approximately 40 per cent allocated to alternatives, comprising 10 per cent in hedge funds and the remainder in private market funds, while that 60 per cent portion is allocated between equities and fixed income, Paul said.
"Hedge funds should enable investors to navigate as well as take advantage of dislocation in markets, particularly in periods of economic uncertainty. Meanwhile, we believe private markets offer a variety of opportunities to earn income and also grow wealth over time, including investment in like private equity, private credit and real estate," she said.
However, the journey into alternative investments requires careful navigation.
“While adding alternatives to a portfolio has shown to improve risk-adjusted returns, there is no one size fits all," Paul said.
“Therefore, I believe it is important for investors to take into consideration a few factors in their decision on which alternative investment is a good fit for their portfolio.
“Some of the factors they can consider, for example, overall investment objectives, liquidity constraint, their risk tolerance, target risk-adjusted returns or premiums that they want to be compensated for the risk and illiquidity they're going to take, and also the positioning of alternatives within their overall portfolio, just to name a few”.
Late last year, JP Morgan Asset Management (JPMAM) said that while it views the 60/40 portfolio as an attractive building block for investors in the changing macro environment, it believes that adding a 25 per cent allocation to alternative assets could boost a traditional portfolio’s returns by 60 bps.
“As investors navigate a world in transition, it is crucial to build smarter portfolios by extending out of cash and benchmarks, expanding opportunity sets into alternatives and adding greater international exposure for better diversification and returns,” said Sylvia Sheng, global multi-asset strategist, J.P. Morgan Asset Management, at the time.
Back in April last year, the world’s largest asset manager, BlackRock announced it was abandoning the 60/40 portfolio in favour of a novel approach to constructing “tactical and strategic” portfolios.
“We don’t see the return of a joint stock-bond bull market like we saw in the Great Moderation. That was a decades-long period of largely stable activity and inflation when most assets rallied and bonds provided diversification when stocks slumped,” BlackRock’s strategists said.
“We believe in a new approach to building portfolios.”
To hear more from Paul on the 60/40 strategy, click here.
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.
