New options for yield in a balanced portfolio
Investors have been told to lower their expectations for returns in a low-interest environment. With questions over whether the traditional 60/40 balanced portfolio is still fit-for-purpose in these uncertain times, it may be time to add something new to the mix.
The balanced investment portfolio, targeting 60% equities and 40% bonds, was designed to deliver reliable returns and diversification. While the exact make-up depends on individual risk tolerances and timeframes, it’s an approach that has seen investors through many market cycles. Until now.
With ongoing equity market volatility and government bond yields hitting record lows, the time may be ripe to reconsider both returns and risk mitigation. In March 2021, Australia’s three-year bond rate slipped to under 0.096% p.a., while the RBA held interest rates at a historic low of 0.10% p.a.
Re-thinking fixed income
Around the world, central banks are under pressure to hold interest rates low so that governments can grow their way out of pandemic-induced debt.
Over 85% of developed market government bonds are yielding below 1.00% p.a. and around 35% deliver negative yields. This trend is reflected in the corporate bond market too, which means yields from a global 60/40 portfolio are at their lowest for multiple decades. And that’s unlikely to change any time soon.
This dynamic creates an income and diversification challenge: how do you replace the income and diversification traditional fixed income has provided in the past? An increased weighting to equities could boost returns, but only if you accept considerably higher volatility – an important consideration if you are close to retirement and seeking reliable income and capital preservation.
Building extra resilience
The underlying premise of a balanced portfolio is still sound: balance growth assets (like equities) with defensive assets (like bonds and cash) to reduce the impact of volatility, ensure some liquidity, and deliver returns and growth within a target time horizon.
But the market has changed. And so have the number of investment options available – especially for wholesale investors.
In the US, there’s a growing acceptance that alternatives should be part of the investment allocation mix, with one chief investment officer suggesting “supplementary allocations to alternatives in the range of 15 to 20%”. There may still be core exposure to equity and fixed income, but non-traditional asset classes can provide uncorrelated (or low correlation) returns to stocks and bonds.
In this way, alternative investments can arm you with a third diversification arrow for your portfolio quiver. And they are often backed by real underlying assets, like commercial or residential real estate, adding an extra layer of security to the investment.
For example, AltX gives you access to first mortgage-backed real estate debt, with the potential for regular income in the form of interest payments over a relatively short timeframe. With typical returns between 4% p.a. and 8% p.a., it starts to look attractive against the traditional fixed income component of the portfolio mix.
And AltX’s track record of returning 100% of capital to investors points to the potential that an allocation to this sector can deliver.
In the aftermath of the pandemic, Australian investors are looking for new ways to build resilience into their portfolios and still get attractive returns. Alternatives like private debt could be the missing link.
Investors have been told to lower their expectations for returns, AFR, June 8, 2021
Three-year bond rate slipped to under 0.096%, Reuters, 12 March, 29021
Fixed income markets will bear the scars of Covid-19 for many years, JP Morgan, February 15, 2021
Is it time to rethink the classic 60:40 investment portfolio? Nick Raphaely from AltX joins AusBiz TV to discuss whether this tried and tested allocation theory may have passed its used-by date.
Australia’s scorching property market has made traditional valuation methods seem almost obsolete – We asked a panel of experts for their insights into the current state of the market around the country – and where we go from here.
One area attracting a lot of attention is real-estate debt investments. As with any investment, it is important to understand the factors driving the returns, as well as the key areas of risk.
According to AltX Co-Founder and co-CEO Nick Raphaely, credit flow is critical to the economy – and right now there’s a kink in the flow. As presented on AusBiz TV.
Property has long been seen as a “safe as houses” investment in Australia, underpinning 51% of the nation’s household wealth. But with challenges to investing in property, tech platforms are opening new fractional investment opportunities for the savvy investors.