Asset Allocation
Real Assets remain underweight in investor portfolios, a gap the 2020s bond bear market has exposed. We provide specifics on constructing a portfolio that supplies more than diversification, it delivers return. The specific weightings may not fit every investor, but the three core principles behind them can.
High-profile adoptions of the Total Portfolio Approach (TPA) and the often-cited outperformance of TPA funds have generated FOMO among funds following an SAA framework. Buzzwords and vague rulesets frustrate anyone trying to learn more. We combed through the TPA literature, built practical examples, and found that many components are just best practices, repackaged. Our suggestion: look past the hype, adopt what fits, ignore what doesn't.
MacroQuant recommends a slight underweight position in equities, counterbalanced by a slight overweight to bonds, and a significant overweight to cash. The model is positive on the US dollar, modestly negative on gold, and bullish on copper and oil.
We estimate that a US 60/40 portfolio will return 6.9% over the next 10-to-15 years. In this update, we include hedging costs projections and revamp our scenario analysis to incorporate hypothetical outcomes to the AI capex cycle.
An acute shortage of AI hardware will support tech stocks into year-end. However, AI companies may need to ultimately generate $10 trillion per year in revenue to justify their capex. Barring a massive increase in productivity growth, this will be very difficult to achieve. Despite today’s Treasury announcement of upsized buyback operations, bond yields are likely to remain elevated over the coming months. Rising crack spreads have reduced the demand for crude, which is not encouraging for global growth. On the FX front, recent intervention to support the yen will probably be insufficient, but there is significant long-term upside for the currency.
