Jamie Kramer
Over the course of my 30-year career, the market’s greatest challenges have been driven by growth shocks–not inflation shocks. From the burst of the dot-com bubble to the global financial crisis and its sluggish recovery, each episode tested global growth and risk appetite far more than it pushed prices higher. In fact, this era was defined by globalization and generally low inflation, fueled in large part by technological advances, the rise of the Internet, China’s ascent and central bank credibility, all of which supported both company profits and bonds.
Despite the volatility, a simple, balanced portfolio thrived in this environment: $100 invested in a U.S. dollar 60/40 stock-bond portfolio in September 1995 is worth $785 today. But, as we explored in the 30th edition of our “Long-Term Capital Market Assumptions,” the macro backdrop is evolving—and so, too, must portfolios. We believe investors should now consider a “60/40+” portfolio: one that builds on the classic approach for a new era.
The next decade will likely bring a wider range of macroeconomic scenarios than in the past 30 years. Investors must be ready not only for growth shocks, but also for inflationary surprises—like those that emerged in the wake of the COVID-19 pandemic and persist today.
Our long-term outlook calls for resilient global growth, as public and private investments in technologies, such as artificial intelligence, help offset structural weaknesses. We also see slightly higher average inflation, with greater volatility. A major driver for both growth and inflation is fiscal activism in developed countries, which is expected to spur aggregate demand.
We see that in action in Europe, possibly Japan and the U.S., where the Trump administration’s signature tax package could result in more than $3 trillion in federal spending over the next decade even before interest costs are taken into account. Economic nationalism—tariffs, onshoring and immigration restrictions—may further amplify inflation volatility and stagflationary risks, especially during the transition period while supply chains adjust.
While disinflationary forces are in play, especially with a focus on AI, investors would be prudent to consider inflation hedges as well as growth hedges in their asset mix. Bonds have struggled in inflationary regimes, a key reason why it is time to increase the tools in our portfolios to enhance returns and smooth the ride—to diversify the diversifiers. This includes supplementing the 60/40 portfolio with three elements: private alternatives; market-neutral or trending public assets; and active management to improve risk-adjusted return.
What is the impact of adding private assets? Our forecasted return for a 60/40 portfolio over the next 10 to 15 years is 6.4%. If investors add a 30% allocation to a diversified mix of private alternatives, it creates a “60/40+” portfolio, which increases the forecasted return to 6.9% and improves the Sharpe ratio by 25%. These private alternatives—such as private equity, private credit and real assets—offer additional levers for alpha generation, income and diversification. Many real assets serve as strong diversifiers. They exhibit a low or negative correlation to public markets and can also provide inflation protection.
Our development of a “60/40+” portfolio design is not limited to private markets. Within public markets, investors can look beyond traditional investment approaches. They can incorporate strategies that use public assets for pure alpha, rather than beta, or that benefit from trending markets and commodities, such as an algorithm-driven systematic macro approach. These diversifiers can further reduce volatility and risk while maintaining liquidity. A “60/40+” portfolio allows investors to use more tools in their toolkit, so they can be better prepared for a larger set of scenarios given the more volatile world we are in—increasing their time in the market.
Success of a “60/40+” portfolio design depends not just on asset allocation, but on thoughtful manager selection, portfolio construction and effective risk management. Skilled active managers can identify and capitalize on opportunities across both public and private markets, adapting to changing market conditions.
Given the macroeconomic environment we expect over the coming years, we believe broader is better. The 60/40 is not dead—it is evolving. By embracing a forward-looking approach and leveraging a diverse set of tools, we believe investors can build resilient portfolios that make the most of a shifting market.
Jamie Kramer is the CIO and global head of multi-asset solutions at J.P. Morgan Asset Management, overseeing $510 billion in assets and serving on its operating and investment committees. She is also the executive sponsor for Girls Who Invest, promoting women in investment management.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of CIO, ISS Stoxx or its affiliates.
Tags: 60-40 portfolio, Asset Management, Inflation, investment returns, Volatility