JPMorgan: Protect 60/40 portfolios with alternatives
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The stock market can't climb skyward forever. Returns are expected to come down to earth in coming years, says JPMorgan chief global strategist David Kelly. So investors should look to alternative investments like private equity for both a boost and a hedge against volatility.
Why it matters: Portfolio protection in the future may look more like private equity and less like Treasury bonds.
What they're saying: "Diversification needs to be broader than bonds going forward," David Lebovitz, global market strategist with JPMorgan Asset Management, said Monday at a media roundtable at the bank's office.
- If investors add even 10% exposure to alternatives, that decreases volatility and increases returns compared with a traditional 60/40 portfolio (60% invested in stocks and 40% in bonds.), JPMorgan says.
- The highest returns with the lowest volatility come from portfolios with as much as 30% allocated to alternatives, 30% to bonds and 40% to stocks.
Zoom in: Alternative investments can play a "better diversification role" for clients, Stephen Parker, co-head of global investment strategy at JPMorgan Private Bank, said.
- These alternative investments might include private equity, direct lending, hedge funds, infrastructure, physical assets and real estate.
- The attraction to such assets partly reflects an increased correlation between stocks and bonds, making it harder to hedge one against the other.
Between the lines: While alternatives could be considered a bet against bonds and stocks, the JPMorgan team still sees plenty of value in these traditional asset classes.
- Returns could double for those who are invested in the stock market.
- Yet the rally, JPMorgan notes, is largely powered by the AI boom, while sectors tied to the cycle of the broader economy, such as health care and consumer products, are dragging down investor portfolios.
- That leaves the team calling U.S. equities "still exceptional" but aiming to diversify through international assets, currencies and alternatives.
What we're watching: Parker notes that clients are increasingly seeing public and private markets as a more unified investing bucket.
- This is particularly true as smaller firms have stayed private for longer, growing to become essentially large caps in the process. To access what used to be small-cap stocks, investors turn to private equity, Parker said.
- On the public markets side, the JPMorgan team recommends active management so clients can benefit from the winners of the AI trade without simply piling into momentum trades, Kelly said.
The bottom line: If trees in fact cannot grow beyond the sky, then investors may look to alternatives for further upside going forward.
