A research paper published by BMO Global Asset Management suggests traditional balanced portfolios may be passé, and that investors should consider alternative investments if they need to generate higher returns.
The report notes that the traditional 60-40 split between equities and bonds may no longer be appropriate since historical returns are unlikely to be replicated given today’s rock-bottom interest rates. In fact, the paper predicts that investors who hold balanced portfolios should expect to see a four percent lower return over the next ten years compared to what this kind of portfolio was able to deliver over the last 35 years.
New market exposures
"To meet today's diversification and return expectation challenges, investors will need to consider investments that utilize unique strategies or new market exposures," says Kristina Kalebich, senior alternatives specialist and co-portfolio manager at BMO Global Asset Management. "A good alternatives option should either give the portfolio a higher return for the same amount of risk, or the same return for a lower amount of risk. Our research indicates best practice may be to compile a complementary blend of active alternative managers and multi-alternative strategies to make the most out of diversification opportunities."