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KKR researchers see challenges ahead for 60-40 portfolio and suggest more alternatives

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Two high-ranking research pros at private equity firm KKR & Co. Inc. on Wednesday suggested that investors should reexamine the traditional 60/40 portfolio construction model as a way to diversify against inflation.

The popular portfolio construction of 60% stocks and 40% bonds has been a way to balance losses in stocks with gains in fixed income in order to carry investors through both good times and bad.

But Henry McVey, chief investment officer of KKR’s
balance sheet, and Racim Allouani, who oversees portfolio construction, risk management and quantitative analysis, put forth a different view in the latest Insights report from the $496 billion AUM money management firm.

In a report released Wednesday entitled, “Regime Change: The Benefits of Private Credit in the ‘Traditional’ Portfolio,” McVey and Allouani reiterated the importance of increasing allocations to more inflation-resilient assets from the world of alternatives.

Instead of 60% stocks and 40% bonds, KKR suggested considering a 40%/30%/30% equities/bonds/alternatives allocation. These alternatives included a 10% portfolio holding in private credit, along with infrastructure and real estate.

“Now is a particularly attractive time to allocate capital to private credit, which is benefitting from a variety of factors, including traditional lenders pulling back, improved lending terms, higher absolute yields and access to higher quality counterparties,” the authors said.

While McVey and Allouani said the 60/40 portfolio could snap back in the short term, but conclude that alternatives could help protect portfolios better in the current environment of elevated interest rates.

“We believe that we are entering a new environment for investing, an environment where structural forces – in particular the changing structural relationship between stocks and bonds – demand a new approach to portfolio construction,” the authors said. “Key to our thinking is not only are forward returns likely to be lower for risk assets such as public equities, but also traditional fixed income may no longer serve as a shock absorber, or diversifier, when paired with other asset classes in a diversified portfolio.”



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