Alternative Investing
The 5% Solution
May 1, 2012
Topics - Alternative Investing Asset Allocation Strategic Asset Allocation
Institutional Investor
Institutional investors commonly target 5% real annual returns, or 7% to 8% nominal returns. At the time this paper was written, however, the authors estimated the prospective real yield on a 60/40 portfolio — 60% equities and 40% fixed income — was less than half that: 2.4%, the lowest in 112 years. Thus, they asserted, traditional allocations were unlikely to achieve 5% real returns in the following 5 to 10 years.
The standard universe of “alternative asset classes” was not likely to fill the gap, they said, because it tends to repeat the problem of concentration in equity risk, just at a higher fee. Despite all of this, the authors said they believe that some investors can still achieve the 5% goal, or at least come closer to it, if they embrace a modest amount of innovation and thoroughly prepare themselves to see it through. Broadly, they recommend:
- Harvesting a broad set of return sources, far broader than the typical set that relies heavily on the equity risk premium.
- Implementing a series of portfolio management methods we label “alpha in portfolio construction.”
- Putting in place the risk control necessary to see this approach, or any other, through tough times.
"No single idea will do the trick," they wrote, "but each of these can help investors get closer to the 5% real-return target."
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This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of Belvedere. The views expressed reflect the current views as of the date hereof and neither the author nor Belvedere undertakes to advise you of any changes in the views expressed herein.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither Belvedere nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.
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