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JPMorgan is suggesting a broader portfolio mix for optimal returns in the coming 10-15 years.
The new portfolio has 30% in alternatives, including 7.5% in real estate and 4.5% in private credit.
Economic nationalism, tech adoption, and capital rewiring are key themes influencing future returns.
Should you ditch the 60/40 ?
For optimal returns over the next 10-15 years, the answer might be yes, according to JPMorgan Asset Management.
In its “2027 Long-Term Capital Market Assumptions” report published this week, the firm offered another portfolio structure to consider in place of the classic 60% stocks and 40% bonds. Instead, the firm outlined a portfolio containing a whopping 30% allocation to alternative investments.
Here’s exactly how the portfolio looks:
Allocation Asset
42% Global stocks
28% Global bonds
7.5% Real estate
7.5% Other real assets (gold, infrastructure, commodities)
7.5% Private equity
4.5% Private credit
3% Hedge funds
JPMorgan says this mix is set to deliver 7.5% average annual returns over the next 10-15 years, while the 60/40 will return 7%.
But it’s not just the return outlook that makes JPMorgan’s portfolio suggestion more optimal. It’s also more diversified, less risky, and less prone to moving in lockstep. The firm’s portfolio has a 21% higher Sharpe ratio than the 60/40, meaning it delivers better returns relative to its risk profile.
The 60/40 stock and bond positions were initially designed to be natural hedges, with one making up for the other in times of volatility. Historically, when the stocks have fallen, bonds have outperformed as investors have sought refuge in safe-haven assets. In the current inflationary environment, however, bonds have weather a bleak stretch of losses as investors demand higher yields, while inflation has also weighed on stocks.
“The volatility of inflation, rates and equities will likely move higher over our investment horizon. Meanwhile, we expect the stock-bond correlation to be more positive and unstable,” a team of strategists at the bank wrote. “A resilient portfolio can lean into opportunities while drawing on diversifiers to cushion the impact of different types of shocks.”
In the report, JPMorgan highlighted three big themes that will drive returns over the next decade-plus and impact assets in different ways.
First is the rise in economic nationalism, which will be inflationary as countries become more protectionist and reshore industries. This will be bad for bonds but good for real assets, JPMorgan said.
Second is technology adoption — namely, AI — which is good for productivity gains and economic growth, which is good for stocks, real assets, and alternatives, the bank said.
And third is capital rewiring, referring to a shift in investment trends, where trade surplus economies start investing their capital in their home countries as opposed to abroad.
“As economies such as Germany deploy more of their capital at home to improve their economic resilience, this reduces the amount of excess savings seeking a home globally, with important implications for global capital flows,” the bank said.
This will push up bond yields as US Treasurys will have more competition for capital, but US stocks should be fine and continue to attract foreign investors given their ongoing strong performance, JPMorgan said.
With upward pressure on bond yields coming from multiple sources, having exposure to non-correlated assets in the alternatives space can help to boost portfolio returns.
Funds that offer exposure to the the themes laid out in the portfolio above include: the iShares MSCI ACWI ETF (ACWI), the Vanguard Total World Bond ETF (BNDW), the iShares Global REIT ETF (REET), the VanEck Real Assets ETF (RAAX), and interval funds offering exposure to both private equity and private credit.
Read the original article on Business Insider
