3 active steps to enhance portfolio returns
The 60/40 Asset Allocation Has Two Problems – The “60” and the “40”
By: Phil Camporeale, Investment Specialist, Multi-Asset Solutions
What a world we live in. Never in the history of financial markets have the four major developed market currencies – Dollar, Euro, Pound Sterling, and the Yen – delivered a “risk free” rate as close to zero. While this is an explicit problem for an aging developed market world craving income, it is an implicit problem for total return given the low “carry” component in fixed income assets such as core fixed income.
Moreover, in an effort to stimulate growth and inflation expectations, major Central Banks embarked on unprecedented balance sheet expansion known as “Quantitative Easing”. While this produced asset price inflation in the U.S. with the S&P 500 up over 300% since March 9th, 2009 through the end of February 2019, it acted more as a steroid than a medicine as core inflation is still running below the Fed’s 2% target with marginal wage inflation.
A downshift in long-term return expectations
Where does this lead us now? Each year our team publishes “Long Term Capital Market Assumptions” which are 10-15 year annualized return assumptions for major global asset classes. Our 2019 long term capital market assumption for a static 60% U.S. Equity (S&P 500) and a 40% Fixed Income (Barclays Aggregate Index) asset allocation is now down to 5.5% annualized. This is a direct reflection of a quicker than expected run up in equity prices as well as anticipation of a continued low growth and rate environment. To put our 5.5% annualized number into context, this same static 60/40 allocation has delivered a whopping 12.2% return since March 2009 and is over 200bps lower on an annualized basis from our assumptions ten years ago.
Stock-bond frontiers: 2019 vs. 2018 and 2008 assumptions (USD)
Opinions and statements of market trends that are based on current market conditions constitute our judgment and are subject to change without notice. These views described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results. JPMAM Long Term Capital Market Assumptions: Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only–they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only
J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.
Investments in bonds and other debt securities will change in value based on changes in interest rates. If rates rise, the value of these investments generally drops.
International investing bears greater risk due to social, economic, regulatory and political instability in countries in "emerging markets." This makes emerging market securities more volatile and less liquid developed market securities. Changes in exchange rates and differences in accounting and taxation policies outside the U.S. can also affect returns.
Securities rated below investment grade are considered "high-yield," "non-investment grade," "below investment-grade," or "junk bonds." They generally are rated in the fifth or lower rating categories of Standard & Poor's and Moody's Investors Service. Although these securities tend to provide higher yields than higher rated securities, they tend to carry greater risk.