There’s a great piece out from BMO talking Alternatives and the danger of the 60/40 portfolio moving forward, and we can’t help but point out some stats and charts.
On the 60/40 portfolio:
As we move further away from the Great Recession, the traditional 60/40 portfolio faces headwinds that have not occurred for much, if any, of its existence, [mianly] a significant assumption within the 60/40 paradigm — historically strong bond returns with low volatility — is no longer realistic with low bond yields in the current environment. Modest inflation and an accommodative Federal Reserve partly account for lower yields, but a broader look shows yields have been in a secular decline since the early 1980s. Lower bond yields, combined with a sustained low-interest-rate environment, should prompt investors to question whether a traditional 60/40 approach will continue to work. Our expectations are that even moderately risky balanced portfolios should expect returns more than 4% lower over the next 10 years compared to what a 60/40 portfolio delivered in the last 35 years. Investors will need to find a way to adapt.
Showing the tremendous growth in alternatives:
Assets in liquid alternative funds went from around $50 billion in 2006 to more than $300 billion in 2015, and the number of funds available increased almost fivefold, from 132 to more than 600 in the same time period.
On the spaghetti dinner which is alternatives classification:
Distinguishing among strategies and identifying their sources of return and risk is challenging. The categorization of alternative strategies can be confusing. Hedge Fund Research lists four broad categories and 37 subcategories (plus four types of funds of funds); these do not always square with Morningstar’s system of categories (see Exhibit 2). Investors may not know what they’re getting.
And some lessons to be gleaned from all of it:
A good alternative option should give the portfolio either a higher return for the same amount of risk or the same return for a lower amount of risk.
To meet today’s diversification challenges, investors will need to distinguish liquid alternative strategies that rely on new market exposure, such as volatility and frontier markets, and those that rely on manager skill, such as market neutral, 130/30, long/short equity and macro strategies. Here it is important to note that many “new market exposures” may already appear in investors’ portfolios — REITs and commodities are two common examples. The difficulty of finding truly new exposures, then, encourages a longer look at active management, where sources of return and risk are less dependent on market movement.
Manager selection in the alternatives space is arguably more difficult than in traditional long-only strategies because the stakes are higher. This is because the dispersions of both returns and levels of market exposure among alternative managers are greater than those in traditional long-only managers.
Their conclusion is that an allocation to a multi-alternative product solves a lot of these problems. We’ll agree in part, but note that there are some single strategy funds masked in multi-alternative clothing out there (like a fund which is roughly 60% long stock exposure…surely that’s not very alternative), making it worthy to consult with an alternatives pro who can take a good look under the hood for you (hey, we know a pretty good one). 855-726-0060.