Trustnet examines how different assets can alter investors’ returns and risk profile.
Commentators were quick to call the end of the 60/40 portfolio, but adding alternative assets might not bring huge benefits, according to data from Trustnet.
A traditional balanced portfolio is invested 60% in equities and 40% in bonds, providing investors with strong diversification, with the share of fixed income securities expected to rise when equities fall, and vice versa.
However, many have disputed this negative correlation in recent weeks, amid fears that bonds and equities have been moving in tandem for too long.
David Hollis, the future fund manager of Artemis Strategic Assets, told Trustnet that the new environment of rising interest rates is disrupting the strategy.
Vivek Paul, Head of Portfolio Research and Chief UK Investment Strategist for the BlackRock Investment Institute, agrees, saying: “In the new regime characterized by higher volatility, higher inflation and supply constraints, bonds will not perform as well as relative portfolio weighting during the Great Moderation. Portfolios need to be constructed differently.
Vanguard multi-asset product specialist Mohneet Dhir disagreed, noting that traditional allocation depends on investors accepting the risk-reward trade-off and appreciating the historical characteristics of different types of investment.
“It would be remiss not to acknowledge the double fall in stock and bond markets in 2022, but it can sometimes happen before the negative return correlation between stocks and bonds reasserts itself. Indeed, global bond prices rose in the first half of March as global equities sold off,” he said.
For investors looking to modify their portfolio and add more diversification, we’ve looked at some of the most popular alternative asset classes to see if adding them is worth it in the long run.
The answer depends on investors’ willingness to mitigate their risk or increase returns. In the table below, we have shown the returns achieved by a 60/40 portfolio, which is represented by the MSCI World and Bloomberg Global Aggregate indices respectively.
We’ve included one-, three-, five-, and 10-year total returns, as well as the maximum drawdown and volatility for each time period.
In a decade, the portfolio has doubled investors’ money, up 100.2%, with volatility of 8.3% and a maximum drawdown – the most an investor would have lost in consecutive months – of 9.1%.
Source: FE Analytics
The best addition to a portfolio would have been infrastructure, which is represented by the FTSE Developed Core Infrastructure Index.
It would have added 5 percentage points over the decade and is the only asset that would have been a net gainer over three, five and 10 years.
The other asset class to value the portfolio over 10 years is private equity, measured by the average of the IT Private Equity sector, no benchmark index being applicable.
Here, investors would have gained 4.5 percentage points more over the decade and volatility would have been lower, although the biggest consecutive decline of 10.9% was slightly higher.
Oil was the most volatile addition and would have given investors the biggest maximum drawdown, with returns consistent with the 60/40 portfolio.
However, the situation changes with the addition of the S&P GSCI Brent Crude Spot in recent years. Oil has surged in recent years as Covid and then the war between Russia and Ukraine disrupted supply chains and caused prices to spike.
Over three years, a 10% position would have nearly doubled the return of the traditional 60/40 portfolio (35.3% vs. 18.2%), the best on the list.
The worst addition is property over 10 years old, represented by IT UK Commercial Property. Overall, investors would have been the worst off by 3.2 percentage points, although volatility would have been significantly muted. At 7.8%, this is the least volatile strategy, according to the data.
Adding a 10% position in gold and proportionally reducing exposure to stocks and bonds, represented by the S&P GSCI Gold Spot, would have returned investors 97.1% over the decade, which is less than the traditional portfolio, although the maximum drop was the lowest in the market. list at 7.8%.
However, over the past year it would have been the best thing to own, more than doubling the meager 0.31% returns offered by a 60/40 portfolio and also topping the five-year charts.
Finally, the addition of the HFRI Fund Weighted Composite index to represent hedge funds would also have reduced volatility (8% over 10 years), but slightly reduced returns (99.5%).