Key Takeaways
- • Diversification gap exposed: In 21% of observations since 1973, equities and bonds suffered simultaneous negative real returns, undermining the traditional two-asset-class framework that many DC default strategies rely on for portfolio construction.
- • Alternative risk premia delivers comparable returns with better risk metrics: JPMorgan Asset Management's modelling demonstrates that alternative risk premia strategies matched the returns of conventional DC glide paths (transitioning from equities through diversified growth funds to bonds) while delivering an improved Sharpe ratio, indicating superior risk-adjusted performance.
- • Late-cycle positioning favors strategic reallocation: Given current market conditions and the substantial asset bases in DC plans, portfolio managers are evaluating whether introducing liquid alternatives to reduce equity and bond concentration risk is justified, according to Sorca Kelly-Scholte, head of EMEA solutions at JPMAM.
- • Liquidity constraints demand alternative solutions: DC defaults face structural pressure to construct diversified portfolios within tight budget parameters while maintaining sufficient liquidity—a challenge that liquid alternatives, particularly those isolating low-correlation return factors, are positioned to address.
Summary
The structural vulnerability of defined contribution default strategies has become increasingly apparent as traditional two-asset diversification models face real-world stress testing. Analysis presented in the sector reveals a material historical weakness: since 1973, equities and bonds have simultaneously posted negative real returns in approximately 21% of observations, according to Cohen & Steers. This finding directly challenges the assumption that bond allocations provide meaningful diversification during equity market downturns—a foundational premise underlying most DC default fund construction.
Many current DC defaults rely on elevated equity allocations paired with passive, low-cost vehicles to drive accumulation-phase growth, with the expectation that diversified growth funds and later fixed income allocations will provide portfolio resilience in later lifecycle stages. However, research has demonstrated that diversified growth funds themselves exhibit higher correlation with both equity and bond markets than fund managers would prefer, limiting their defensive utility during synchronized asset-class selloffs.
Alternative risk premia strategies have emerged as a potential solution to this diversification deficit. ARP strategies systematically identify and isolate return-driving factors with demonstrated low correlation to traditional equity market movements. Critically, JPMorgan Asset Management's long-term market modelling indicates that ARP strategies delivered returns comparable to a conventional DC glide path structure while achieving a materially improved Sharpe ratio—a metric that adjusts returns for volatility and reflects superior risk-adjusted performance. This evidence suggests that alternatives need not sacrifice return potential to achieve meaningful diversification benefits.
The strategic case for introducing liquid alternatives into DC defaults gains additional weight given current market positioning and the scale of accumulated assets in these plans. Sorca Kelly-Scholte, head of EMEA solutions and advisory at JPMorgan Asset Management, articulated the emerging view among institutional allocators: "Where we are in the cycle and given the size of the assets in these plans, does it make sense to begin to diversify some of this risk?" The question reflects a candid acknowledgment that traditional late-cycle portfolio structures may no longer be sufficient, and that the cost-conscious framework that has long dominated DC default design may require tactical updating to reflect evolving market realities.
Many current DC defaults rely on elevated equity allocations paired with passive, low-cost vehicles to drive accumulation-phase growth, with the expectation that diversified growth funds and later fixed income allocations will provide portfolio resilience in later lifecycle stages. However, research has demonstrated that diversified growth funds themselves exhibit higher correlation with both equity and bond markets than fund managers would prefer, limiting their defensive utility during synchronized asset-class selloffs.
Alternative risk premia strategies have emerged as a potential solution to this diversification deficit. ARP strategies systematically identify and isolate return-driving factors with demonstrated low correlation to traditional equity market movements. Critically, JPMorgan Asset Management's long-term market modelling indicates that ARP strategies delivered returns comparable to a conventional DC glide path structure while achieving a materially improved Sharpe ratio—a metric that adjusts returns for volatility and reflects superior risk-adjusted performance. This evidence suggests that alternatives need not sacrifice return potential to achieve meaningful diversification benefits.
The strategic case for introducing liquid alternatives into DC defaults gains additional weight given current market positioning and the scale of accumulated assets in these plans. Sorca Kelly-Scholte, head of EMEA solutions and advisory at JPMorgan Asset Management, articulated the emerging view among institutional allocators: "Where we are in the cycle and given the size of the assets in these plans, does it make sense to begin to diversify some of this risk?" The question reflects a candid acknowledgment that traditional late-cycle portfolio structures may no longer be sufficient, and that the cost-conscious framework that has long dominated DC default design may require tactical updating to reflect evolving market realities.
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