Portfolio manager sees more potential to manage risks and add client value by expanding toolbox
While balancing portfolios between stocks and bonds has been a sound strategy over the last several decades, that formula needs to be augmented with new solutions, according to one top portfolio manager.
“The traditional 60/40 portfolio that has worked very well for last 35 to 40 years is no longer working,” says Martin Pelletier, senior portfolio manager at Wellington-Altus Private Counsel. “You have 60/40 portfolios in the US whose returns are reflecting a 20% drop in value this year, which are pretty big losses for a conservative type of investor.”
Some portfolio managers might be able to find some success by adjusting sliders within the control panel of fixed income and equities – looking for alternative geographic allocations, exploring the full small- to large-cap spectrum, or drilling deep into sectors, for example – but Pelletier argues there’s more risk management potential to be unlocked by expanding their toolbox into alternatives.
Read more: Is it time for the 60-40 portfolio to grow up?
“Typically, people rely on bonds to go up as stocks go down. But interest rates and inflation are preventing that from happening,” he says. “This is when it’s useful to look at and deploy other strategies, while being careful and recognizing the underlying risks that go with them.”
That view is echoed by Kristi Ashcroft, executive vice president, Products & Solutions at Mackenzie Investments, who sees exciting trends toward expanding retail investors’ access to private assets such as private credit, infrastructure, and private equity.
“We believe investor allocations to these areas will increase over the next few years as some traditional asset class returns may be more muted in the current environment,” Ashcroft told Wealth Professional. “Private assets represent an exciting opportunity to diversify portfolios and enhance risk/return characteristics.”
In a recent survey by fintech firm Delio, 94% of wealth firms said they are either already offering clients access to alternative assets or are working towards it. Nine tenths of respondents (88%) also reported their clients are looking for access to illiquid markets as clients seek greater returns and diversification in their portfolios.
The fintech provider – whose operational footprint covers Europe, North America, Asia and Australia – also found two thirds of firms have transacted more than five private-market deals in the last 12 months, including 38% of managers who have been involved in more than 20 deals.
Read more: HNWIs are focusing more on alternatives, but which ones?
“We believe there is enormous opportunity to add private assets to portfolios for diversification and potentially attractive returns,” Ashcroft says. “New product structures address some of the appropriate apprehension investors have had about locking up money for extended periods in private asset investments, and make these segments of the market more accessible than ever before to retail investors.”
As the universe of product choice in private markets expands for retail investors, Pelletier believes investment advisors will also have a greater role to play for their clients.
“A lot of these alternative strategies aren’t being directly offered to individual investors. In many cases, they don’t have the time or ability to properly analyze and determine whether they’re appropriate,” he says. “This is where an advisor needs to work on behalf of the client as a fiduciary, so they can utilize the appropriate tool for what they're trying to achieve.”
