Can Liquid Alts Save The 60-40 Portfolio?

(Money Marketing) The 60/40 portfolio has traditionally been regarded as the baseline model for a balanced portfolio. Its simple structure — made of 60% invested in potentially higher-risk areas such as equities and 40% in lower-risk assets such as bonds — was considered a good strategy. It aimed to deliver reasonable returns with a protective net for when equity markets were not performing well.

“To oversimplify a little bit, the past 30 years have been a terrific time to be an investor. All you needed to do was to take broad exposure to the two major asset classes to get good returns and a good risk experience,” says Orbis Investments investment counsellor Rob Perrone.

Yet bonds or fixed income securities in general do not deliver the same yields after successive global financial crises. In short, they do not give investors either additional returns or a safety net.

Difficult environment

This does not mean the 60/40 portfolio has become obsolete or may never work again, but it’s likely to struggle in an environment with low government bond yields and reduced real yields on corporate bonds.

For this reason, I believe advisers and investors may want to explore alternative assets. They may not find an exact replacement for bonds, but a good spread in diversification can be a good cushion as well.

Eventually, perhaps, someone will find the recipe for a new balanced portfolio.

Tilney Smith & Williamson managing director of corporate affairs Jason Hollands says: “You can achieve greater diversification benefits taking a true multi-asset approach that might also incorporate alternatives such as hedge funds, private equity, infrastructure, property and commodities such as gold.

“These asset classes have become a lot more accessible over the past decade thanks to exchange traded commodities, investment company launches and the availability of absolute return strategies in Ucits structures.”

Alternative assets may also offer a broader spectrum of opportunities and higher returns for daring investors.

Venture capital trusts

Depending on the individual’s risk profile, venture capital trusts (VCTs) can generate significant returns.

Octopus Investments head of strategic growth Nick Bird says: “Beyond the attractive tax reliefs, investors can benefit from the diversification offered by VCTs as they’re one of the few ways to access a managed portfolio of earlier-stage unlisted companies.

“Because of the investments they make, VCTs are inherently high risk, which you need to be comfortable with, but they also offer the potential to generate a tax-free income stream and growth if the underlying companies perform well.

“Unquoted companies like this are also less likely to be affected by market sentiment as their shares aren’t traded on a main stock exchange. Instead, their share prices are calculated periodically, based on the underlying performance of the business.”

Advisers even may want to keep an eye on cryptocurrencies. For now, these are not a regulated asset, but I believe it is a question of time before they gain widespread acceptance. They have become too big to be ignored and remain the asset of choice among younger generations.

A broader spectrum of opportunities and higher returns for daring investors may derive from alternative assets

Those younger people may have different tastes in terms of assets and risk attitude compared to their parents. Therefore a 60/40 portfolio may not satisfy them. They may prefer more tailored portfolios that reflect their preferences and interests.

I may be proved wrong, but I do not think we will ever witness a comeback of the 60/40 model.

It is up to advisers to venture beyond traditional assets and experiment with alternatives to create new portfolio models.

Eventually, perhaps, someone will find the recipe for a new balanced portfolio.


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