What is replacing the traditional 60/40 portfolio ratio?

  • If fixed income occupies a sizeable allocation, bonds must provide some level of returns — which has not been the case with bond returns over a period
  • Owing to the pandemic, high-yield bonds see increased default risk
  • Investors have to add new asset classes to their portfolios without adding more equity risk if they want to achieve the same returns that the 60/40 portfolio has provided historically.
  • Historically equity markets reached its all-time high and continued to set new limits over the years but bonds rate are decreasing. Everyone wants yield, but they’re stuck in a zero yield environment. It is necessary to rethink the 40% allocation in the portfolio.
  • While the 60/40 mix has produced solid returns over the past few decades, market conditions have been changing in recent years. This has led an increasing number of investment strategists and advisors to suggest diverse portfolios that can deliver long-term growth with a reasonable level of risk.
  • The surge in alternative investment may be attributed to the following factors:
  • Track record of superior risk-adjusted returns
  • Ability to find alpha in private capital vs public capital
  • Significant growth in opportunities in emerging and frontier markets
  • Private capitals being able to fund businesses through their lifecycles, leading to a steady decline in the number of listed companies
  • Technology (especially block chain) facilitating private networks — investors and fund managers can conduct transactions and monitor their portfolios at reduced costs vs public markets
  • Given the volatility in capital markets, alternative assets have been an attractive bid to diversify and enhance returns. However, as markets continue to change and newer instruments (such as cryptocurrencies and uniform MBS (uMBS) emerge, fund managers would have to keep evaluating their investment strategies and questioning underlying assumptions.
  • When a new investment product/asset class enters the market, it also brings with it new regulations, governing bodies, and penalties.
  • Asset management companies, in turn, have to ensure that their structural/systemic flows can handle these new instruments. This includes the setting up of new data points and the creation of corresponding rules in their compliance systems.
  • As alternative investments grow, asset allocations are likely to see rapid changes. Given this, it is imperative that these companies ensure compliance with client guidelines and keep them up to date on developments in regulations.

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Acuity Knowledge Partners

Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/