Portfolio implications
08-11-2021
Jared Gross
Paul Kennedy
Grace Koo
- Expected low returns from a 60/40 portfolio call into question the efficacy of traditional approaches to asset allocation. In particular, the inability of fixed income to provide either compelling returns or diversification suggests that investors need a fresh approach to portfolio construction.
- Instead of a traditional “barbell” strategy built with high volatility equity and low volatility, negatively correlated bonds, we recommend a “full spectrum” approach to uncover alternative sources of return.
- In the full spectrum approach, investors move into a range of nontraditional investment strategies (fixed income-focused, mid risk and equity-focused) and adjust their risk management to address higher levels of complexity and illiquidity.
- In addition to capturing higher beta returns, a full spectrum approach offers higher alpha potential for appropriately skilled and resourced investors.
- While diversification will remain central to asset allocation, the management of liquidity will become an increasingly important tool.
A move toward real assets and mid risk strategies can achieve a better return
AN ILLUSTRATIVE EXAMPLE OF A “FULL SPECTRUM” PORTFOLIO
Source: J.P. Morgan Asset Management; estimates as of September 30, 2021. Expected return captures LTCMA asset classes’ beta return expectation. Additional return potential captures elements such as added nonbeta return from unconstrained fixed income, asset allocation and strategy-specific return drivers beyond the beta loading. *Core real estate, core transport and core infrastructure are all global asset classes.
The 26th annual edition explores how the legacy of the pandemic – limited economic scarring but enduring policy choices – will affect the next cycle. Despite low return expectations in public markets, we think investors can find ample risk premia to harvest if they are prepared to look beyond traditional asset classes.