While questions surround the validity of the classic portfolio consisting of 60% stocks and 40% bonds, many are considering turning to alternative investments.
The average portfolio assignment to alternatives is expected to rise 3% by 2026. Investors are looking at other ways to allocate assets as stock and bond yields face pressure from higher yields, a backdrop reminiscent of the historic 60/40 drawdown of 2022 .Some even argue that the 60/40 model is outdated.
“If you look at 60/40, it’s a 40-year-old technology,” said Ramin Kamfar, founder and CEO of alternative asset manager Bluerock, in an interview with InvestmentNews. “Institutions realized when you run analysis, alternatives will make the portfolio more efficient. You get a higher return with a lower level of risk. So that’s what the leading institutions did.”
The problem, says Kamfar, is that this solution has not been available to individual investors and advisors. “Alternatives should be a big part of that allocation. It’s (not) really the most prominent edges in 60/40, it’s 50/30/20, with a 20% allocation to alts.
Jeff Schwaber, CEO of Bluerock Capital Markets, said 60/40 didn’t work for several reasons.
“One, because there was no yield, and two, because there was an abundance of interest rates, the price of the underlying fixed income security or the bond went down and down. So it was challenged,” Schwaber said.
Brad McMillan, chief investment officer and managing director at Commonwealth, argued that 60/40 is working well and that one or two hits shouldn’t mean the end of it.
“It’s been broken for the past year or two, but nothing works all the time,” McMillan said. “The reason we got the results we did was because interest rates went up very strongly. It was kind of a unique situation.”
McMillan added that he does not expect interest rates to emerge over the next two years as they have over the past two years.
Interval funds are a vehicle that Bluerock uses that helps investors access alternatives. Although less well known, interval funds are a transformation between closed-end funds and an open-end mutual fund.
“Many may not realize, but an interval fund is actually a 40-Ago mutual fund that is regulated by the SEC,” Schwaber said. “It has the same corporate governance and visibility. It has a five-letter ticker symbol, it reprices every day. The only difference is that your liquidity is quarterly, not daily.”
McMillan said that from a regulatory perspective or an investment perspective, mezzanine funds bring something to the table. “It also opens up the possibility of harvesting some of the illiquidity in some of these asset classes in a way that is more available to the average investor.”
When it comes to what alternatives investors or advisors should add to their portfolio, Bluerock says real estate.
“Inflation, which is the environment we’re in right now, is great for real estate,” Kamfar said. “As it raises replacement costs to build an apartment building or build a warehouse, it also happens to raise net income from the real estate, which is ultimately how you get value.”
Schwaber added that not only does real estate generate income and tax-efficient income, but there hasn’t been a time that real estate and institutional commercial real estate hasn’t appreciated to a new high through a market cycle like it did in the last cycle. .
He said that real estate is considered the biggest hedge against inflation, which is important to protect against purchasing power risk and inflationary measures.
“It also lowers the volatility of a portfolio, taking some of the generally more volatile stock market and putting it into an alternative asset class,” Schwaber said.
“Assuming you’re in the right kind of real estate, like apartments, warehouse and life sciences, which we like, you’re going to do very well in this inflationary environment,” Kamfar said.