For a long time, stock pickers have aspired to outperform the market. Yet, most fail, with an alarming 80%-90% of U.S. large-cap mutual funds underperforming the S&P 500 over a decade after fees. However, there are broader strategies for generating what is known as 'alpha'—outperformance of a benchmark—by crafting portfolios with diverse assets, ranging from cash to bonds to commodities. This strategy is being emphasized by asset management firms like Pimco and State Street Investment Management. Both companies participated in this week's CNBC 'ETF Edge' to delve into where they seek unique returns outside the U.S. large-cap stock arena.
These managers aren't dismissing the potential of the U.S. stock market. But with the equity markets experiencing significant volatility due to geopolitical developments, macroeconomic uncertainties, and the varying interest rate policies of central banks worldwide, diversifying portfolios and making minor adjustments could potentially enhance returns by 2026.
Matthew Bartolini, Global Head of Research Strategists at State Street Investment Management, highlighted how 2025 was the first year since 2019 where stocks, bonds, gold, and commodities all surpassed cash in performance. "The concept of craftsmanship alpha or portfolio construction alpha emerges from this scenario, rather than merely beating an index," he explained.
Start with Your Cash
Investors can begin by reconsidering the role of cash in their portfolios. With a substantial amount of assets locked in cash-equivalent accounts, Bartolini remarked, "Even departing from cash can generate alpha." Jerome Schneider, Pimco's Head of Short-Term Portfolio Management, emphasized managing cash as a crucial initial step, noting that enhanced cash accounts could yield 1%-2% more than conventional accounts.
Pick Bonds, Not Stocks
Schneider also suggested that investors seek additional returns through bonds without trying to outdo the S&P 500. Pimco offers a relevant ETF: the actively managed PIMCO US Stocks PLUS Active Bond ETF (SPLS), which synchronizes passive exposure to the S&P 500 with active bond strategies.
While Pimco anticipates stable economic growth in 2026, despite uneven performance across various sectors and households in the U.S., Schneider emphasized the importance of looking beyond domestic markets. He referenced the divergent monetary policy trajectories across nations such as Canada, Japan, Australia, and the UK as potential sources for relative-value opportunities, noting the unprecedented variety in monetary policies seen for the first time in a financial generation.
Schneider also advised broadening fixed-income exposure, including options like agency mortgages, rather than focusing solely on corporate credit late in the economic cycle. He warned that passive benchmarks might restrict flexibility amid volatile valuations and geopolitical tensions. Active fixed-income funds have historically outperformed benchmarks, contrasting with the mixed results seen in equity funds, as noted in the S&P Global SPIVA scorecard, which monitors funds against benchmarks.
Tweak S&P 500 Exposure and Risk Profile
Bartolini clarified that improving traditional portfolio designs doesn't necessitate abandoning the U.S. market, a topic garnering significant attention this week amid concerns of a 'sell America' scenario due to uncertainties surrounding President Trump's foreign policy. It might involve exploring additional asset classes to mitigate U.S. market risks. State Street offers the SPDR Bridgewater All Weather ETF (ALLW), launched last year with hedge fund Bridgewater Associates. This ETF embodies such a strategy, investing across global equities, bonds, inflation-linked bonds, and commodities.