Investors should reject traditional equity and bond asset allocations in favour of more exposure to alternate investments, according to Aberdeen Asset Management.
In a report out today (23 June), the fund house has argued a significant imbalance between global savings and capital investment has led to low yields on government bond returns, and that returns will remain very low for the next 10 years.
Equity returns will probably be modest, according to Aberdeen, especially where stretched valuations are the norm. It also highlights the end of China’s credit boom as a key factor in the expected global economic slowdown.
Aberdeen's ‘Long-term investment Outlook’ report concludes the best prospects for investors are likely to be in alternative assets rather than traditional options, which will require a rethink on the part of multi-asset managers.
Craig Mackenzie, senior investment strategist at Aberdeen, said: “There are still opportunities in equities – the European business cycle at last has some momentum, and emerging markets are still relatively cheap.
"But some of the best opportunities are in alternative assets. We think local currency emerging market debt may offer returns of 6 per cent.
"Emerging market governments have learned from the past and their economies are now run more prudently. Attractive returns are also likely from listed infrastructure investments in roads, hospitals and wind farms.”
Mr McKenzie added: “Equities and bonds will still be vital to many investors’ portfolios. But this is a poor environment for traditional 60:40 equity/bond asset allocation models.
"For decades investors have been combining equities with government bonds to achieve diversified portfolios.
"This worked very well when government bonds produced a 6 per cent return, but it will work badly when returns are only 1 per cent. Combining equities with a diversified mix of higher return alternative assets looks likely to offer investors better outcomes.”
