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November 18, 2020

A New Portfolio for a New Decade

JP Morgan AM Cuts 60/40 Outlook, Backs Hunt for Alternatives South Coast Investment Advisors has been sounding the alarm on the headwinds facing the traditional 60/40 portfolio for some time. Portfolio architecture is something all investors should think long and…

A New Portfolio for a New Decade

JP Morgan AM Cuts 60/40 Outlook, Backs Hunt for Alternatives

South Coast Investment Advisors has been sounding the alarm on the headwinds facing the traditional 60/40 portfolio for some time. Portfolio architecture is something all investors should think long and hard about as we usher into a new decade. JP Morgan addressed how the bank would navigate the current landscape during a fund manager call this month.

  • Popular balanced strategies hampered by negative bond returns
  • Alternative assets may help solve dilemma of classic hedging

JPMorgan Asset Management is cutting its projections for cross-asset returns over the next decade and signaling more pain for 60/40 allocations that have long formed the bedrock of traditional portfolios.

Such a balanced approach will earn 4.2%, down from 5.4%, in coming years, according to the $2.3 trillion fund manager in a Thursday presentation.

Strategists at the firm reduced their forecast for global equities by 1.4 percentage points to 5.1% in the next decade, citing elevated valuations in U.S. large caps. They forecast negative inflation-adjusted returns across almost all sovereign bonds over the next 10 to 15 years, with yields remaining low even after rates normalize. They are not the only manager making warnings, Blackrock Capital recently updated their market assumptions to reflect a 60/40 portfolio forecast averaging 4.3% annualized over the next 10 years.

These forecasts further undermine faith in decades-old investment strategies that aim to balance the risks of stocks with the safety of bonds. The approach allocates a majority, 60%, to equities tied to economic growth, while the remainder is put into bonds which act as a ballast and cushion downturns.

But Wall Street is increasingly worried about returns going forward for this breed of investing. With yields near historic lows, even small changes could create big price swings for Treasuries and losses if inflation picks up.

The answer to the conundrum lies in joining the boom in alternative assets, according to JPMorgan AM, investments in private equity, property and infrastructure, to name a few.

The strategists upgraded their expectations for real estate in the U.S., to 5.9%. Global core infrastructure is poised to gain 6.1% and transportation 7.6%. Yet the outlook for private equity came down 1 percentage point to 7.8% on higher valuations and increased competition among buyers. The strategists said hedge funds returns are likely to improve after a lackluster year.

“To navigate the new decade, investors may consider diversifying from traditional safe assets that no longer offer income, and toward alternative assets that more fully exploit the specific tradeoffs that a portfolio can tolerate to potentially find higher returns,” said John Bilton, head of global multi-asset strategy at JPMorgan Asset Management.

 

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