Traditional 65/35 portfolio unlikely to meet real return targets: study

The paper advocated for a systematic, data-driven approach to building alternatives portfolios

A traditional 65/35 equity-bond portfolio is unlikely to deliver a real annual return of 4.5% on its own, according to a joint study by Singapore sovereign wealth fund GIC and J.P. Morgan Asset Management (JPMAM).

The paper argued that long-term investors now need to incorporate a meaningful allocation to alternatives—such as private equity, private credit, real estate, and infrastructure—to meet inflation-plus return targets.

The study found that allocating more than 20% of a portfolio to alternatives can significantly improve the odds of achieving CPI-plus-4–5% returns, whilst also reducing downside risk.

An actively managed version of this allocation—dubbed “Active Smart Alts”—could add an additional percentage point of alpha on top of a well-constructed alternatives mix.

According to the report, alternatives offer two distinct alpha sources: dynamic asset allocation, which allows tilting toward assets, and manager selection, especially in segments like buyouts and venture capital. Together, these sources could generate around 1% in portfolio-level alpha.

The paper advocated for a systematic, data-driven approach to building alternatives portfolios, moving beyond what it calls the historical “finger painting” method.

The proposed six-step framework includes setting objectives, screening the investable alternatives universe, and determining long-term strategic weights.

It also recommended active capital deployment over 12–24 months, rigorous risk management using conditional value-at-risk and stress testing, and integration of emerging themes such as digital infrastructure, climate investing, secondaries, and niche credit.

GIC and JPMAM cautioned that traditional listed proxies like REITs or infrastructure stocks do not accurately reflect the risk-return profile of private alternatives.

They highlighted issues such as appraisal lag, smoothing, and survivorship bias in common indices, and stress the importance of forward-looking return assumptions that account for fees and structural inefficiencies.

The report recommended blending multiple allocation methods—such as mean-variance optimisation, risk parity, and Omega optimisation—to avoid over-concentration or simplistic allocation models.

It concluded that alternatives should no longer be considered supplementary or opportunistic. Instead, they should form a core component of institutional portfolios, offering both stronger return potential and better resilience in inflationary or stressed market environments.