Lower bond yields and significant stock market volatility are challenging the successful returns of traditional balanced portfolios, which should prompt investors to consider the benefits of an alternative investment strategy, according to a white paper released on Monday by Chicago-based BMO Global Asset Management (BMOGAM), a part of Toronto-based Bank of Montreal.
The current state of the stock market will make it difficult to sustain the strong historical returns of a balanced portfolio, whether it leans to the more conservative or moderate side, states the paper, entitled Finding a new balance with alternatives.
Specifically, the report cites the example of a moderate risk portfolio, which produced a return of 9.6% between 1981 and 2015 but is expected to produce a lower return of 4.5% over the next 10 years.
“To meet today’s diversification and return expectation challenges, investors will need to consider investments that utilize unique strategies or new market exposures,” says Kristina Kalebich, senior alternatives specialist and co-portfolio manager with BMOGAM, in a statement. “A good alternative option should either give the portfolio a higher return for the same amount of risk, or the same return for a lower amount of risk.”
The publication of the report comes at a time when a greater number of retail investors have access to alternative strategies, and “this relatively new access — combined with a wide range of strategies that are now available — has created a need for clarity, proper selection and portfolio construction,” says Lowell Yura, head of multi-asset solutions with BMOGAM, in a statement. “A multi-strategy approach, which provides exposure to a wide selection of alternative investments, can help investors and financial advisors navigate this asset class efficiently.”
One of the components to a properly managed alternative strategy is the right team of multiple managers, who have their own specialties in different markets and strategies that will contribute to a diversified portfolio. The report suggests a team of six to 10 underlying managers is generally appropriate, as it will ensure that the contributions of each manager are not diluted.
The report, which has more suggestions on choosing the right alternative strategy team, is available on BMOGAM’s website.
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