The 60/40 portfolio has long been a standard for retirement planning, with a 60-per-cent stock weighting providing the growth engine and the 40-per-cent bond allocation offering more modest growth and acting as a life preserver during stock corrections.
It’s an investment blueprint that has served clients well. However, financial markets have evolved in recent years and investors are increasingly challenged to find attractive future returns in an environment where bond yields are at historic lows and stock valuations in many sectors are soaring.
“Many investors have a target rate-of-return they’re trying to achieve over the long term to realize their financial objectives, but when we look at today’s starting valuations, bond yields are exceptionally low and equity markets are now priced rich relative to long-term fundamentals,” says Todd Mattina, senior vice-president, chief economist, portfolio manager and co-lead of the Multi-Asset Strategies Team at Mackenzie Investments.
“The danger is that it’s going to push more long-term investors further out the risk frontier, taking on even more equity risk to achieve those long-run target returns that they need.”
What’s more, some of the diversification benefits of stock and bond returns appear to have changed over recent times, with prices more often moving in the same direction, limiting the safe-haven value of fixed income. Put together, it makes the 60/40 portfolio a more challenging bet over the next decade.
Fortunately, the deviation comes as individual retail investors gain more access to ‘alternative’ investments that fall outside the conventional asset categories of stocks and bonds. Examples of alternative investments include private equity and debt, real estate, infrastructure, commodities, and liquid alternative strategies that utilize tools like leverage, short-selling and derivatives with the aim of better managing risk or amplifying return potential.
How alternatives can benefit investors
Alternatives cover a broad range of investments and have distinct benefits. Generally speaking, they give investors access to areas of the capital market that can be difficult to penetrate for retail clients and offer potential advantages such as enhanced returns, higher yields and/or risk mitigation. Many institutional investors have historically incorporated alternatives into their portfolios to augment expected returns or for more effective diversification— partly driven by alternatives’ low correlation to traditional investments and hedge against inflation.
Alternatives can also sometimes provide higher rewards. For example, within private markets, illiquidity premiums are expected to compensate investors with higher returns given that privately held securities can either be more difficult to sell relative to those in public markets or require long-term holding commitments. But higher potential rewards are not exclusive to private markets. Liquid alternative strategies (increasingly available as mutual funds and ETFs) can, and often do, employ leverage — using borrowed money to amplify investment exposure. Such a strategy may involve, for example, effectively levering up total asset exposure with an aim to allow for a better balance of risk across different assets for a given target rate of return. Additionally, short-selling securities a portfolio manager believes will continue to deteriorate allows for the ability to profit during falling markets.
Alternative investments are often misunderstood outside of private assets, often known for relatively higher expected returns than traditional public markets. Many investors aren’t aware of the difference between alternative assets and alternative investment strategies. Alternative assets include infrastructure, private debt, real estate and commodities, while alternative strategies use tools like short positions or leverage using derivatives with the aim of amplifying returns and managing volatility. Each offers different diversification benefits to a portfolio.
“Alternative assets and alternative investment strategies have different objectives and how you fund it would depend on whether you’re aiming to boost your return or trying to control your risk,” Mr. Mattina says.
These approaches are typically not available in traditional products that are widely available to individual investors.
“It really depends on the risk-and-return objectives of the individual investor,” Mr. Mattina says.
The ‘democratization’ of alternative investing
The broader access to alternative investments is part of the ongoing “democratization” of the asset class to retail investors, Mr. Mattina adds.
Until a few years ago, alternatives were only available to institutional or high-net-worth investors. But some restrictions have started to come down, Mr. Mattina says, due in part to regulatory changes that allowed leverage to be included within certain mutual funds.
Mackenzie has been a leader in the alternative space and launched Canada’s first liquid alternatives strategies mutual fund in 2018. The company currently offers six alternative mutual funds and three ETFs covering strategies such as private equity replication, enhanced yield, global macro, credit absolute return, real estate and global infrastructure. Its most recent fund offering is the Mackenzie Northleaf Private Credit Fund, available to accredited investors, as part of a partnership with Northleaf Capital Partners, a global private markets investment firm.
“As this trend towards the democratization of alternatives continues, asset management companies like Mackenzie are devoting more time and energy and developing alternative products geared for individual investors,” Mr. Mattina says.
With several ways of investing in alternatives, Mr. Mattina recommends investors seek expert advice when figuring out the best way to incorporate them into their portfolios.
“How to fund an allocation to alternatives is really dependent on the risk and return objectives of the individual,” he says. “One thing we’ve always stressed is that it’s really valuable to work with a trusted financial advisor on those kinds of questions.”
Mr. Mattina says a financial advisor can help determine the best allocation for the investor and how that traditional 60/40 mix should evolve going forward.
“We think that, as these become more available to individual investors, we’re going to see them becoming a larger share of the conventional asset mix.”
Speak to your financial advisor. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. For the Mackenzie Northleaf Private Credit Fund, please refer to the applicable offering memorandum.
Advertising feature produced by Globe Content Studio with Mackenzie Investments. The Globe’s editorial department was not involved.