Recent election uncertainty
The recent U.S. presidential election, resulting in Donald Trump's return to office, has introduced additional variables that could impact investment strategies. Trump's proposed policies, including tax cuts, increased tariffs, and deregulation, are expected to influence various sectors differently. For instance, financials, energy, and industrials may benefit from deregulation and infrastructure spending, while technology and consumer goods could face challenges due to trade policies.
In this post-election landscape, staying informed about policy changes and market reactions will be essential. Regular portfolio reviews and adjustments, ideally in consultation with financial advisors, can help investors navigate the uncertainties and capitalize on emerging opportunities.
Examining the 60/40 portfolio
Historically, the premise behind the 60/40 portfolio is that during economic slowdowns, when stocks decline, fixed-income assets — like bonds — can provide both income and risk mitigation. This inverse relationship has helped provide a buffer against market downturns.
However, post-pandemic, “the dynamics underpinning the ‘diversified’ 60/40 portfolio have changed,” according to BlackRock commentary, undermining the core principle of diversification central to this strategy. In 2022, for example, the S&P 500 posted a negative return of 19.4% due to factors such as inflation, supply chain issues and geopolitical tensions, while bonds did not provide the anticipated counterbalance due to rising interest rates.
Although the market has since bounced back — with the S&P 500 up 34% year-to-date as of late November 2024 — continued macroeconomic uncertainty, compounded by the recent U.S. election results, has sparked questions over the durability of the traditional 60/40 portfolio among many investors. While some investors remain optimistic about this strategy, particularly in today’s high-yield environment, others express concerns about economic growth and future Federal Reserve actions, which could potentially increase price volatility and tighten spreads in fixed-income markets.
“No one can predict the future, but the next phase of the market cycle will not look like that of the last decade, when investors enjoyed the longest bull run in US history. So, investors should consider adjusting how they build their portfolios,” note authors Charles De Andrade, CAIA, and Soren Godbersen in a CFA Institute commentary.
Amid current uncertainties, many investors are exploring alternative assets with differentiated risk profiles, historically lower volatility, and potential for long-term returns as part of their core investment considerations. Key asset classes in this space include real estate, farmland, infrastructure, and private credit, each offering unique benefits and characteristics for portfolio diversification.
Real estate
Historically, real estate has demonstrated a low correlation with traditional assets and offers potential for long-term capital appreciation, driven by factors like population growth and urbanization trends. Moreover, real estate investments can provide income streams through rental yields, offering a potential source of cash flow amid economic fluctuations.
Between 1992 and 2024 — a period that includes the 2008 financial crisis — the average annual growth rate for U.S. residential real estate prices was 5.5%, according to a CEIC Data study based on the Federal Housing Finance Agency’s House Price Index. The average annual inflation rate over that same period was 2.58%.
Commercial real estate has also delivered sustained growth: according to IMF data compiled by the St. Louis Fed, between 2005 and 2023, the sector boasted an average annual price-increase rate of 4.2%, notwithstanding the 2008 crisis and the COVID-19 pandemic.
But the commercial real estate market has certainly faced strong headwinds in recent years, driven by higher interest rates, the softening of market fundamentals and tighter lending standards by banks. According to an analysis from CBRE, the normalization of hybrid working arrangements has also continued to limit growth in demand for office space. Calculations from The Conference Board estimate that, in the coming two years, more than $1 trillion in CRE loans will come due. This situation is exacerbated by skyrocketing costs for CRE management, including labor, energy and insurance premiums.
While real estate valuations are still adjusting from their 2022 peaks, there remain “attractive opportunities in several property types, including industrial and logistics, necessity retail and some types of residential,” according to BlackRock’s 2024 Private Markets Outlook.
One real estate sector gaining attention among investors is industrial, such as warehouses and trucking terminals, driven by the need for onshoring and nearshoring to support faster, more reliable e-commerce delivery, which was at a premium during and immediately after the pandemic, when demand for home delivery of products spiked.
Demand for industrial space may be leveling off. The 93.7 million square feet of U.S. industrial space was newly occupied in 2023, compared to a record high of 486.6 million square feet of completed construction, according to the NAIOP’s Q1 Industrial Space Demand Forecast.
The life science sector is also increasingly attracting real estate investors, driven by the demand for specialized buildings, like research labs, biotech facilities, and medical offices. This demand is supported by growing investments in healthcare and biotech companies.
A recent CBRE report highlights steady increases in U.S. government funding for health research and an ongoing boom in clinical drug trials —with the proportion of Phase 1 and 2 trials reaching its highest point since 1998 in 2023 — as key potential drivers of demand for lab space. However, as with other sectors, challenges such as high material costs and recent geopolitical conflicts have impacted the sector. Consequently, new capital investment has slowed, with CBRE estimating a 46% decrease in venture capital funding between 2021 and 2023. Looking forward, the sector is expected to stabilize in 2024, “favoring companies with strong data and proven potential,” as noted in Deloitte’s 2024 Global Life Sciences Sector Outlook, even as “the IPO market remains tepid.”
Farmland
Farmland has become increasingly attractive to investors due to its potential for stable, uncorrelated returns and its role as a hedge against inflation.
Data from the USDA indicates that farmland values have consistently appreciated over the past several decades. According to the NCREIF Farmland Property Index, farmland averaged 10.52% (income + appreciation) and a standard deviation of 6.61% from 1992 to 2023. This appreciation is driven by several factors, including increasing global demand for food and a steadily decreasing supply of arable land — as the world's population grows, so does the need for arable land, which is inherently limited. Furthermore, farmland can also provide investors with steady income through rental payments or crop yields.
Farmland investments can also offer diversification benefits, as the value of farmland is influenced by agricultural-specific factors–– such as crop prices, shifting consumption trends, and long-term supply and demand dynamics––rather than general market sentiment. As a result, farmland returns have historically exhibited low correlation with other asset classes, including stocks (-0.05) and bonds (-0.17), according to a report from FarmTogether. This low correlation can help reduce overall portfolio volatility and risk, providing downside protection during periods of market turbulence.
Despite its history of attractive risk-adjusted returns, farmland remains underrepresented in investment portfolios. This underrepresentation is partly due to the fragmented nature of land ownership and the specialized knowledge required to underwrite properties. However, as investment solutions emerge to lower these barriers, farmland is becoming more accessible to a wider range of investors.
For example, FarmTogether, a farmland investment firm offering creative capital solutions in farmland, provides investors with access to high-quality farmland through five products: Crowdfunded Offerings, Bespoke Offerings, Tenancy-in-Common Offerings, Separately Managed Accounts (SMAs) and the Sustainable Farmland Fund. The firm manages over $200 million in U.S. private farmland, sourcing and providing investors with access to a diverse array of farmland offerings across multiple criteria, including geography, commodity type, acreage, price range, deal structure, and investment strategy.
Infrastructure
Infrastructure provides essential services required for economic growth — from toll roads to airports to smart grids. As nations around the world look to digitize and decarbonize their infrastructure, this asset class presents a unique investment opportunity. It’s estimated that about $100 trillion in new infrastructure investment will be needed by 2050, according to the International Energy Agency (IEA). As part of the Inflation Reduction Act, the U.S. is planning to spend $370 billion over five years to boost its renewable energy capacity. This is happening globally as well: European legislation aims to boost renewable energy generation by 45% by 2030, while countries in the Asia-Pacific region have pledged to reduce their dependence on coal.
Infrastructure assets often have characteristics of a natural monopoly, given substantial barriers to entry, such as high startup costs, extensive regulatory requirements, and limited availability of suitable locations. These factors help limit market competition, promoting more stable revenue streams and reducing business risks. Furthermore, infrastructure projects are frequently funded through public-private partnerships, contributing to their historically low correlation with other asset classes. According to BlackRock’s 2024 Infrastructure Analysis, infrastructure equity has shown an impressive average annual return of 23.3% in high-inflation, low-growth environments.
However, infrastructure investments are not without risks. They can be affected by regulatory or taxation changes, the removal of subsidies, political interventions, construction risks and other macroeconomic factors.
Private credit
Although banks have eased lending standards since 2023, they remain tight compared to historical norms. As a result, some businesses — particularly middle-market firms — are turning to private credit, such as direct lending, mezzanine debt, distressed debt, and specialty finance.
This shift has increased private credit’s appeal among investors seeking higher yields. Data from Deutsche Bank indicates that private credit funds have delivered average returns of 9% over the past decade. Additionally, private credit can offer diversification benefits, as it is less correlated with public markets and can provide stable income streams through interest payments. In response, Preqin anticipates a rise in demand for both direct lending and other strategies, such as NAV financing and risk sharing, with the “relatively high returns, floating rate structures and senior position in the capital hierarchy attracting those concerned about higher risk, equity-based alternatives.”
However, the International Monetary Fund (IMF) has cautioned that this asset class — which surpassed $2 trillion globally in 2023 in assets and committed capital, with roughly three-quarters in the U.S. — requires “closer monitoring.” Limited oversight and an “opaque” lending environment contribute to the IMF’s concerns. “In a severe downturn, credit quality could deteriorate sharply, spurring defaults and significant losses. Opacity could make these losses hard to assess,” says the IMF. Furthermore, the risk of borrower default is higher in private credit due to the nature of lending to smaller, often less-established companies.
Building resilience in 2025
In today’s complex economic landscape, the traditional 60/40 portfolio may no longer provide the robust protection it once did. By incorporating alternative assets such as real estate, farmland, infrastructure, and private credit, investors may benefit from the unique aspects of these assets, such as a historically low correlation with stocks and bonds, potential for long-term growth, income generation, and inflation protection. Integrating these assets may help investors better navigate the uncertainties of the new year, diversify risks, and adapt to evolving financial conditions—ultimately helping to build more resilient, balanced portfolios for the future.
