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Boost 60/40 returns with allocation to alternatives: JP Morgan

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4 minute read

JP Morgan Asset Management has identified opportunities to build upon the traditional 60/40 portfolio for improved returns over the long term.

The USD 60/40 stock-bond portfolio is forecast to deliver an annual return of 7.0 per cent over the next 10 to 15 years, according to JP Morgan Asset Management (JPMAM).

JPMAM said that, even though the forecast return for the 60/40 portfolio has fallen, it remains an attractive building block for investors in the changing macro environment.

“That is a dip of 20 basis points (bps) from last year, but still a great starting point from which to extend out of cash and into a wide opportunity set, expand deeper into the alternatives universe and enhance with active alpha,” the firm stated.

In its 2024 Long-Term Capital Market Assumptions (LTCMAs), JPMAM predicted that adding a 25 per cent allocation to alternative assets will improve 60/40 portfolio returns by 60 bps.

“As investors navigate a world in transition, it is crucial to build smarter portfolios by extending out of cash and benchmarks, expanding opportunity sets into alternatives and adding greater international exposure for better diversification and returns,” commented Sylvia Sheng, global multi-asset strategist, JP Morgan Asset Management.

Ms Sheng suggested that a number of “market imbalances” which may significantly influence investment returns and risks should be on the radar of investors.

“One of the trends we observed is the growing separation between China and the broader emerging market (EM) opportunity set,” she explained.

“While more favourable fundamentals bode well for non-China EM equities, Chinese equities remain attractive from a valuation perspective and given our forecast for a gradual RMB appreciation. Thus, actively rebalancing and diversifying allocation in EM will be key to capture opportunities and manage risks.”

In the LTCMAs, JPMAM has lowered its projections for EM GDP growth to 3.5 per cent, while developed market (DM) growth has been upgraded to 1.6 per cent. Australia is expected to achieve GDP growth of 2.2 per cent over the long-term.

“We continue to see Australia as the fastest growing of the major developed economies, thanks to its relatively favourable demographics,” JPMAM said.

Due to the rally observed in stock markets in 2023, JPMAM has lowered its long-term forecast for global equities by 70 basis points to 7.8 per cent. The firm indicated that the return premium of EM over DM equity has narrowed by 40 bps in USD terms.

Andrew Creber, Australia and New Zealand chief executive officer at JP Morgan Asset Management, said that the firm uses its LTCMAs to understand the risk-reward potential beyond a single cycle.

“We have always put emphasis on the need to diversify across asset classes, sectors and geographies, especially amid unpredictable markets,” he said.

“Whether investors are just starting on their journey or institutions rebalancing their portfolios, the LTCMAs serve as a sound compass to help guide us through different scenarios as the world is in transition. They help identify new and review existing investment opportunities unique to each client’s long-term goals – considering risk/reward and growth objectives.”

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.