JPMorgan says 60/40 rethink needs alternative investments

Alternative investments such as hedge funds will become essential parts of post-pandemic portfolios due to low interest rates and fewer opportunities for diversification, according to JPMorgan Asset Management.

The fund giant said nontraditional investing can span private equity, alternative credit, real estate and infrastructure, as well as adopting strategies like short selling and leverage. Such approaches will evolve from optional to indispensable over the next 10 to 15 years, the firm said in its annual Long-Term Capital Market Assumptions report.

“The returns from traditional asset classes have just become more and more challenged over time,” Kerry Craig, a global market strategist at JPMorgan Asset in Melbourne who contributed to the report, said Tuesday. A “new portfolio for a new decade” requires more focus on incorporating alternatives, he said in a webinar.

Loose monetary policy and huge stimulus injections to cope with the pandemic have flooded markets with cash this year, pushing up equity valuations and leaving more than $17 trillion of bonds with negative yields. As a result, some investors are questioning the validity of traditional long-term approaches like a balanced portfolio of 60% stocks and 40% bonds.

Wells Fargo Investment Institute recently recommended allocations of as much as 28% to private capital and 12% to hedge funds to help cope with the low-yield environment.

In its own report, JPMorgan Asset said that after suggesting last year that investors look beyond traditional 60/40 strategies, “this year, the impetus is stronger still.”

At the same time, 60/40 portfolios have defied critics in 2020 by posting solid, resilient performances. A model portfolio composed of 60% U.S. stocks and 40% bonds has climbed about 13% year-to-date, according to a Bloomberg index. That’s in line with the rally in the S&P 500 Total Return Index and far superior to the gain in a global hedge fund gauge.

Craig said hedge funds can offer diversification and boost returns, while infrastructure can deliver income in portfolios.

So far, the alternative space has been the domain of more sophisticated investors such as high-net-worth individuals. Challenges remain for smaller investors because of liquidity and transparency issues and high minimum investment levels, Craig said.

Alternatives won’t replace traditional investments, but they “definitely will play a greater role,” he said.