Alternative facts about 60/40 portfolios

28 September 2022 by National Bank Investments
NBI Insights Bulletin – October 2022

With inflation pressures having recently hit the stock and bond markets concurrently, the need for increased diversification and reduced volatility has come to the forefront for investors and advisors alike. While investments are always subject to the whims of market ups and downs, does the traditional 60% equity and 40% fixed income allocation still provide the balance required to diversify exposure in these unprecedented times? 

Adding alternatives to the mix

Given the changing economic landscape, money managers are focusing on a broader allocation to achieve long-term growth with a reasonable level of risk. Institutional investors are relying more than ever on alternative investments such as hedge funds, commodities, real assets, and private equity to build well-rounded portfolios. In fact, recognizing the benefits they provide, many Canadian pension plans have decidedly turned to this asset class in their portfolio construction.

Alternative Investments as a Percentage of Pension Plan Assets

Alternative Investments as a Percentage of Pension Plan Assets

CDPQ and OTPP data as of December 31, 2021
CPPIB and PSP data as of March 31, 2022
OMERS data as of June 30, 2022
Source: NBI

Offsetting market volatility with alternative asset classes

Myriad strategies comprise alternative investments and they can play different roles in portfolio construction. As a tool to diversify away from public equity and fixed income securities, they can complement traditional asset classes through differentiated sources of returns.

While stocks generally suffer in a recessionary environment, bond prices usually rise when central banks lower interest rates to bolster the economy. The inverse correlation tends to cushion overall returns and help curb volatility. This typical scenario, however, has not always held true during times of high inflation. 

For instance, the early 1970s saw a period of loose monetary policies, generous fiscal stimuli, and energy supply disruptions that sparked a decade of stagflation. Is history repeating itself? Both stocks and bonds can decline if hawkish central bankers hike interest rates to rein in runaway prices. As a result, a classic 60/40 balanced portfolio may not provide the same degree of downside protection it has in the past. 

The uncertainties of today’s market environment are the new normal. Integrating alternative investments into a traditional portfolio will potentially reduce volatility and allow for protection in down markets while still offering exposure to growth. Although the notion of diversification is nothing new, taking the road less travelled by adding these types of assets to their portfolio can help investors navigate sometimes difficult markets and reach their objectives over the long term. 

The NBI Liquid Alternatives ETF (NALT) figures among the alternative investments you may consider. 

NALT implements a Systematic Global Macro investment strategy.

  • The portfolio is composed of long and short futures contract positions.
  • Quantitative models determine the allocation and NBI specialists then review these choices.
  • Their application aims to maintain a low correlation with stock markets and to control risks.

Legal notes

The information and opinions herein are provided for information purposes only and are subject to change without notice. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc.

NBI exchange-traded funds (the “NBI ETFs”) are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Management fees, brokerage fees and expenses all may be associated with investments in NBI ETFs. Please read the prospectus or ETF Facts document(s) before investing. NBI ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. NBI ETFs units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. NBI ETFs do not seek to return any predetermined amount at maturity.

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