Here’s the case for a 50/30/20 portfolio allocation
The case for a 50/30/20 portfolio is growing as investors seek to diversify into alternatives as a hedge against a stock and bond market that are each flashing cautionary signals. Traditional balanced portfolios are allocated 60% toward stocks and 40% in fixed income. Investors who choose to incorporate alternatives within these portfolios generally earmark no more than 5% of their holdings toward the category, according to Ayako Yoshioka, senior portfolio manager at Wealth Enhancement Group. Strategies that include private equity and venture capital have a higher barrier to entry, as well as a greater degree of risk, when compared to the traditional financial assets of stocks, bonds and cash. But investor interest in the asset class is growing, with a recent independent financial advisor survey finding that nearly three-quarters of respondents expect to raise their allocations, according to Bank of America. Currently, about half of respondents have 1% to 10% of assets under advisement allocated to alternatives, while 16% of those surveyed have no exposure. The spike in interest is no accident. Investors concerned about the long-term outlook of an expensive equity market, as well as bond yields that have started to move higher, are casting about for assets that are uncorrelated to either market. “You got high valuations in equities, you’ve got this volatility in bonds with interest rates, and you’re no longer getting that total return in bonds that you used to,” said Yoshioka. “And so, let me allocate a little bit, because instead of a 60/40, perhaps it’s a [50/30/20],” she said, clarifying 50% to stocks, 30% to bonds, and the remaining 20% to alternatives. The case for alternatives The case for alternatives is two-fold. When it comes to stocks, investors worry that a market in its third year of a bull run is unlikely to continue serving up annual returns that are upward of 20%, saying the rally’s reliance on the Magnificent Seven is unlikely to reward investors for much longer. In fact, the highly concentrated and overvalued nature of the market spurred Goldman Sachs to issue a bearish long-term forecast , in which the firm’s David Kostin anticipates the S & P 500 will return just 3% on annualized nominal total return basis for the next 10 years. On the bond side of the equation, investors worry the recent volatility in the bond market — in which the benchmark U.S. 10-year Treasury yield , for example, this week briefly topped 4.3% — reflects concern over the government’s precarious fiscal situation. Investors are concerned that the big federal spending policies proposed by both U.S. presidential candidates will cause a spike in rates. “Consumers aren’t over-levered. Corporates aren’t over-levered. I think that’s why everybody’s so focused on the U.S. debt,” Yoshioka said. “Is the U.S. the one that’s over-levered at this point?” Earlier in October, billionaire hedge fund manager Paul Tudor Jones said he would avoid fixed income altogether, instead allocating toward gold, bitcoin and commodities. To be sure, other investors remain constructive on the outlook for equities, saying they remain positive on the asset class as an area for growth especially over the next three to five years — even if there remains the possibility of some near-term volatility. “50%, if you’re just being very general is probably a little on the lean side, I think, if you want to get the type of growth that most of our investors are looking at, no matter what their risk class,” said Mark Malek, investment chief at Siebert. Still, investors say that the the asset class can help hedge against real risks ahead of stocks and bonds. “It’s not about whether or not the S & P 500 is going to continue to be the leadership or not. I think it’s about what insurance policy do you have if it doesn’t continue to be the leader,” Yoshioka said. “You need to have some sort of diversification aspect, in case it switches somewhere and having exposure — whether it’s bitcoin, gold, international, small cap, an alternative asset — those are areas in which you can get that diversification, again, in case that leadership does change.” Some winners The number of investors upping their assets into alternative investments is expected to “significantly increase” with the rise of products and education addressing financial advisors, according to Bank of America. One actively traded exchange traded fund that invests in public and private credit proposed by State Street and Apollo Global Management could open up access to the private markets, if the strategy can pass through regulatory hurdles. Companies that are expected to benefit from the rise of interest in alternative investments include Blackstone , which Bank of America said has a “large first mover” advantage, while Apollo Global Management , Ares Management , KKR & Co. and Carlyle Group could also benefit. One ETF investing in private equity asset managers is the Invesco Global Listed Private Equity ETF (PSP) . — CNBC’s Jesse Pound contributed to this report.
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