Bull vs Bear: Do Alts Deserve More Portfolio Allocation?

Bull vs. Bear is a weekly feature where the VettaFi writers’ room takes opposite sides for a debate on controversial stocks, strategies, or market ideas — with plenty of discussion of ETF ideas to play either angle. For this edition of Bull vs. Bear, Karrie Gordon and Nick Peters-Golden discuss the case for trading in the old 60/40 portfolio for an alts augmented 50/30/20 portfolio.

Karrie Gordon, staff writer, VettaFi: Nick, I can’t wait to dive into the world of alternatives with you and why boosting their weighting in a portfolio just makes sense these days. In a panel from the recent Fixed Income Symposium hosted by VettaFi, Hamilton Reiner of JPMorgan Asset Management said something that really stuck with me. While Reiner anticipates investors will employ a 60/40 traditional portfolio mentality for risk, the actual modern portfolio will likely be closer to a 50-30-20 composition. This means 50% allocation to stocks, 30% to bonds, and 20% to alternatives and other enhancement strategies like covered calls.

A 20% allocation to alternatives and alternative strategies may seem significant but it makes sense. We’re in a new market regime now that the decade-long Fed put on markets is gone. That means greater volatility as a base case, and boosting portfolio diversification beyond just stocks and bonds seems logical to me in such an environment.

Nick Peters-Golden, staff writer, VettaFi: Look, I appreciate the desire for diversifying away from the 60/40 portfolio. That’s pretty much the definition of “thinking outside the box.” However, to lean on another idiom, investors also don’t need to reinvent the wheel. Alts have drawbacks of their own that investors and advisors need to consider. I think that may create an outlook just as murky – if not more so – as the 60/40’s outlook right now.

An Elegant Alternative for a More Modern Age

Gordon: Alternatives span several asset classes and aren’t the soaring, consistent returns producers that equities are. They’re not meant to be, though. The non-correlated return stream means that in times of equity or bond crisis, they can help keep returns afloat.