Many investors are rethinking their portfolio makeup, to incorporate more alternative assets into the mix.Getty Images
The 60-40 portfolio may not be dead, but the investing landscape and broader economy it was built for – one dominated by public companies, predictable bond diversification, and long cycles of low or declining rates – is no longer a given.
Many investors are increasingly turning to alternative assets (alts), from private credit to infrastructure. The aim is to diversify, drive returns and use alts as a hedge against volatility.
A balanced investment strategy traditionally meant 60 per cent in equities for growth and 40 per cent in fixed income for stability. Alts are not a rejection of 60-40, but they’re a way to modernize it, says Andrew Pyle, senior investment and advisor and portfolio manager at Pyle Wealth Advisory in Peterborough, Ont., part of CIBC Private Wealth.
He says one of the most persistent misconceptions is that alts reside in a stand-alone bucket. In practice, he says their role is far more integrated. “It’s not really 60-30-10 for us. Alternatives sit on both sides of the portfolio.”
Bonds have long been considered a ballast against stock market downturns, but not when stocks and bonds decline together. In 2022, rates skyrocketed, pushing both bond and equity returns into negative territory.
Moreover, public markets now represent a steadily shrinking slice of the real economy. The number of U.S.-listed companies has fallen by roughly half since the mid-1990s, according to recent research from Apollo Global Management. Private companies now account for the vast majority of businesses generating the fastest revenue growth.
Lending, credit creation and growth increasingly occur in private markets, while a small cluster of U.S. mega-cap stocks now drive public equity returns.
That structural shift can hold deep implications for diversification. At the same time that public markets have narrowed, correlations between stocks and bonds have risen, particularly during inflationary periods. That has eroded the defensive role bonds once played.
With alts, Mr. Pyle says, “some protect capital and generate income, others provide growth and alpha. The common objective is reducing correlation.”
Two worlds of alts
Within the alternatives universe, there’s a sharp line to draw between liquid alts and private markets. Liquid alts – such as market-neutral, long-short or options-based strategies – are often designed for risk management. They typically offer daily liquidity and they are regulated like mutual funds or exchange-traded funds.
“A market-neutral or liquid alternative strategy isn’t there to generate 20-plus-per-cent returns. Its job is to be steady, reduce volatility, and protect capital when traditional assets struggle,” says Jillian Bryan, senior advisor and portfolio manager at TD Wealth Private Investment Advice in Vancouver.
Private markets, by contrast, offer access to parts of the economy investors simply can’t reach through public securities. “The number of public companies has dropped dramatically,” says Ms. Bryan. “Investors are often missing the most meaningful phase of a company’s growth by waiting for the IPO.”
Private equity, private credit, infrastructure and real assets allow portfolios to participate earlier in corporate growth. But they often come with longer holding periods and less transparency. Income is one of the strongest drivers for adopting alts, as bonds and GICs again struggle to meet return targets.
“With GICs and traditional fixed income no longer meeting client expectations, we’ve had to look elsewhere,” says Richard McDonald, senior wealth advisor and portfolio manager at Calgary-based North Rock Advisory, part of Scotia Wealth Management. “Private credit and structured solutions have stepped in to provide income where bonds haven’t.”
That search for yield has expanded into areas such as private lending within private markets, or through solutions such as structured notes tied to equity market volatility. Such tools either were not around or were not widely accessible even a decade ago.
Be aware of the risks beneath the returns
Alongside their benefits, alts can introduce new risks. Within private markets, the largest is liquidity, says Jennifer Tozser, senior wealth advisor and portfolio manager at Tozser Wealth Management in Calgary, part of National Bank Financial.
“When you go private, liquidity is always the biggest issue,” she says. “Whatever timeline you’re told, you should expect it to be longer. Valuations are opaque, and investors need to be comfortable owning these assets through cycles.”
Complexity is another hurdle. Alts require more education for investors and advisors alike, and they demand deeper due diligence. Fees, structures and suitability matter far more than they do with plain-vanilla stocks and bonds, says Ms. Tozser.
For all the change under way, few professional asset allocators argue for entirely discarding the conventional framework. Instead, it has become a starting point rather than a finished product.
Yuko Girard, portfolio manager on the multi-asset solutions team at Toronto-based Dynamic Funds, says the appeal of 60-40 isn’t in its precise percentages but its philosophy: balance, diversification and resilience. In today’s markets, achieving those goals simply requires a broader toolkit.
“A 60-40 portfolio still makes sense as a foundation. But diversification today means going beyond just stocks and bonds,” Ms. Girard says. “Alternatives, both liquid and private, add tools that didn’t exist for most investors before.”