Elevated public market valuations, historically low bond yields and positive stock-bond correlation are all challenges facing the traditional 60/40 portfolio.
This year’s rally in both stocks and bonds has changed the opportunity set for long-term investors. With the S&P 500 touting a price-to-earnings ratio over 21x and the U.S Agg. yielding 4.4%, the 60/40 is expensive relative to history. Current valuations are trading almost one standard deviation above average, warning future long-term returns may be muted (GTA Page 4). Against this backdrop, active managers can uncover attractive opportunities veiled by rich index-level valuations, while alternatives, like private equity, private credit and real assets, can improve investors’ long-term return potential while reducing volatility along the way.
While there are plenty of opportunities across the alternatives landscape, the 3Q Guide to Alternatives highlights four key themes that investors should keep in mind…
- Alternatives are an effective portfolio stabilizer: Along with elevated valuations, the upcoming U.S. election and mixed signals from macroeconomic data could all contribute to higher market volatility. Allocating to alternatives can reduce portfolio volatility while enhancing total returns (page 7). Moreover, real estate (page 18) and infrastructure (page 37) both have strong track records of generating steady income through various stages of the economic cycle.
- There is more than meets the eye in real estate: After a sharp repricing across the sector, green shoots are starting to emerge in commercial real estate. While delinquencies are trending higher in office, they have stabilized in industrial, multifamily, hotel and retail (page 35). Moreover, while office vacancies and net operating income growth continue to weaken, fundamentals in other sectors remain intact (page 23).
- There are secular growth opportunities in infrastructure: Over the next decade, the energy, AI and re-shoring transitions will all require significant investment in infrastructure. The need for more electrical capacity is particularly strong as hotter summers, data centers and electric vehicles drive new demand. Electricity demand from data centers alone is expected to increase 30% by 2026 (page 43).
- Private equity exit activity, despite improving on the margin, remains sluggish: U.S. private equity exit volume remained below pre-pandemic levels in 1H24 (page 53). While IPO activity has improved in recent quarters (page 54), exits will likely remain subdued until interest rates move lower. Against this backdrop, secondaries are an attractive avenue for investors to gain exposure to seasoned assets at discounted valuations (page 58).
Elevated public market valuations, historically low bond yields and positive stock-bond correlation are all challenges facing the traditional 60/40 portfolio. Moving forward, investors may need to rely on alternative asset allocations to enhance return, income, and diversification in their portfolios. Indeed, investors are already planning on allocating more to a broad range of alternative assets.