Rebalancing Your Balanced 60/40 Portfolio With Alternative Investments

Latest white paper makes the case for incorporating alternatives in traditional 60/40 equity/bond portfolio split

BMO Global Asset Management has released its latest white paper, titled "Finding a new balance with alternatives." The paper considers the evolution of the traditional 60/40 equity/bond balanced portfolio split over the past several decades and concludes that, given the current market environment, investors should consider including alternative strategies to generate potentially stronger returns.

Alternative investments feature a diverse group of strategies and management styles. Among those often included within liquid alternatives mutual funds are equity hedge, credit, relative value and macro-driven tactics. Combined within a multi-manager fund, the overall objective typically emphasizes absolute returns - relying less on the direction of markets to meet investor goals.

"Alternatives are an increasingly popular investment choice, having grown from around $50 billion in assets in 2006 to more than $300 billion in 2015," said Lowell Yura, Head of Multi-Asset Solutions, BMO Global Asset Management. "Until recently, retail investors have had limited access to alternative strategies and, as a result, may not be very familiar with these types of investments and how they can add value. This relatively new access - combined with a wide range of strategies that are now available - has created a need for clarity, proper selection and portfolio construction. A multi-strategy approach, which provides exposure to a wide selection of alternative investments, can help investors and financial advisors navigate this asset class efficiently."

To justify an allocation to alternatives, the paper points to a significant shift in the traditional 60/40 equity/bond portfolio construction paradigm that has traditionally relied on strong bond returns in a low volatility environment. In the paper, BMO Global Asset Management contends that historical returns are unlikely to be replicated in the current low yield environment. The firm predicts that even moderate risk balanced portfolios should expect more than a four percent decrease in returns over the next ten years compared to what a 60/40 portfolio delivered in the last 35 years.

"To meet today's diversification and return expectation challenges, investors will need to consider investments that utilize unique strategies or new market exposures," said Kristina Kalebich, Senior Alternatives Specialist/Co-Portfolio Manager, 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."

The firm concludes that alternative strategies are best managed from a holistic, total portfolio perspective, considering the available alternative vehicles and how they correlate to one another. The multi-manager investment team can screen and monitor large numbers of potential managers, separating market exposure from identifiable manager skill. They also construct alternative asset allocations that combine the expertise of several managers to deliver breadth and differentiation - coming together, by design, to serve as a complement to the traditional 60/40 portfolio. - marketwired

About BMO Global Asset Management

BMO Global Asset Management is a global investment manager delivering service excellence from 27 offices in 17 countries to clients across five continents. Including discretionary and nondiscretionary assets, BMO Global Asset Management had CDN $304 billion in assets under management as of January 31, 2016.