The end of 60/40 asset allocation?

“We believe that we’re at the beginning of a fundamental shift in the way that Canadian investment portfolios are managed,” he said.

It’s being driven largely by rock-bottom interest rates, according to Moriarty. He pointed out that 10-year government bonds are currently producing returns of about 2%.

“Portfolios comprised solely of traditional assets and strategies will not deliver returns matching [investors’] current expectations and/or requirements,” he said. “They’re likely to be highly disappointed.”

Traditional portfolios comprised of 60% equities and 40% bonds performed well in the 1980s and 1990s, since equities and fixed income both generally performed well during that period. For instance, a benchmark portfolio made up of 60% Canadian equities and 40% Canadian bonds produced nominal returns of 13% in the 1980s and 10.7% in the 1990s.

But in the past decade, this portfolio would have produced nominal returns of just 6.5%.

In response to these weaker returns, Moriarty said many institutional asset managers have adjusted their investment mix over time to include a greater proportion of alternative assets such as commodities and real estate.

“It appears that they’re changing their asset mix to incorporate more alternative strategies,” he said.

This approach is helping managers achieve higher returns. For instance, U.S. endowment funds, which have sizeable allocations to alternative investments, produced returns more than 300 basis points higher than funds with a typical 60/40 asset mix in the 10 years ending June 30, 2010.

Retail investors may need to follow suit and look beyond stocks and bonds in order to achieve returns that allow them to meet their long-term objectives, Moriarty said. He urges advisors to help clients find professional money managers who can produce more favourable risk-adjusted returns than a 60/40 asset mix.

“These markets are very complex, and I think utilization of professional investment managers who think about more than just plain vanilla equities and plain vanilla fixed income is probably where you want to go.”

Moriarty acknowledged that it’s harder for individual retail investors to get exposure to alternative asset classes than institutional investors.

In the U.S., a growing number of funds have emerged for retail investors that incorporate alternative asset classes, and Moriarty expects that more of these kinds of funds could emerge in Canada.

“Certainly, Bay Street has done a pretty good job in terms of manufacturing products for evolving trends in the marketplace,” he said.

But he warned that advisors must watch for high fees on such funds.

“It’s an expensive option,” he said. “You’ve got to make sure that there’s enough incremental return after they charge their fees.”