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JPMorgan Asset cuts 60/40 outlook, backs hunt for alternatives

JPMorgan Asset Management is cutting its projections for cross-asset returns over the next decade and signaling more pain for 60/40 allocations that have long formed the bedrock of traditional portfolios.

Photo: AMR ALFIKY/REUTERS / X04127

Such a balanced approach will earn 4.2 percent, down from 5.4 percent, in coming years, according to the USD 2.3 trillion fund manager in a Thursday presentation.

Strategists at the firm reduced their forecast for global equities by 1.4 percentage point to 5.1 percent in the next decade, citing elevated valuations in U.S. large caps. They forecast negative inflation-adjusted returns across almost all sovereign bonds over the next 10 to 15 years, with yields remaining low even after rates normalize.

The forecasts further undermine faith in decades-old investment strategies that aim to balance the risks of stocks with the safety of bonds. The approach allocates a majority, 60 percent, to equities tied to economic growth, while the remainder is put into bonds which act as a ballast and cushion downturns.

But Wall Street is increasingly worried about returns going forward for this breed of investing. With yields near historic lows, even small changes could create big price swings for Treasuries and losses if inflation picks up.

The answer to the conundrum lies in joining the boom in alternative assets, according to JPMorgan AM, a long-time proponent of investments in private equity, property and infrastructure, to name a few.

The strategists upgraded their expectations for real estate in the U.S., to 5.9 percent. Global core infrastructure is poised to gain 6.1 percent and transportation 7.6 percent. Yet the outlook for private equity came down 1 percentage point to 7.8 percent on higher valuations and increased competition among buyers. The strategists said hedge funds returns are likely to improve after a lackluster year.

"To navigate the new decade, investors may consider diversifying from traditional safe assets that no longer offer income, and toward alternative assets that more fully exploit the specific tradeoffs that a portfolio can tolerate to potentially find higher returns," said John Bilton, head of global multi-asset strategy at JPMorgan Asset Management.

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