Stock pickers have long aimed to outperform the market, but most face challenges, with 80%-90% of U.S. large-cap mutual funds underperforming the S&P 500 over a decade after fees. However, there are strategic approaches to achieving what is known as alpha—outperformance of a benchmark—by focusing on broader portfolio construction. These methods involve using a variety of assets, ranging from cash to bonds to commodities. Asset management firms like Pimco and State Street Investment Management have been focusing on these strategies, as discussed during this week's CNBC "ETF Edge" to explore avenues for differentiated returns beyond the U.S. large-cap stock market.
Although U.S. stocks are expected to continue performing well, significant market fluctuations driven by geopolitical tensions, macroeconomic uncertainties, and differing global central bank interest rate policies suggest that traditional recommendations for portfolio diversification and strategic tweaks might boost 2026 returns.
Matthew Bartolini, State Street Investment Management’s global head of research strategists, highlighted that 2025 marked the first year since 2019 when stocks, bonds, gold, and commodities outperformed cash. He introduced the concept of "craftsmanship alpha" or "portfolio construction alpha" as alternatives to merely trying to beat an index.
Start with Your Cash
Investors should consider this strategy starting with their cash management. A significant portion of assets remains in cash-equivalent accounts, which Bartolini suggests could generate alpha by moving away from mere cash holdings. Jerome Schneider, head of short-term portfolio management at Pimco, mentioned that enhanced cash accounts might achieve returns of 1%-2% higher than standard cash accounts.
Pick Bonds, Not Stocks
According to Schneider, investors might find additional returns by focusing on bonds instead of attempting to beat the S&P 500. Pimco recently introduced the actively managed PIMCO US Stocks PLUS Active Bond ETF (SPLS). This offering blends passive S&P 500 exposure with dynamic fixed income strategies.
Schneider believes that economic growth will remain robust into 2026 despite uneven performance across U.S. households and sectors. He emphasized the importance of looking beyond U.S. markets, citing the varied monetary policy paths in countries like Canada, Japan, Australia, and the United Kingdom as opportunities for relative value.
Investors should also consider broad fixed-income exposure, including assets like agency mortgages, rather than focusing solely on corporate credit late in the economic cycle. Schneider warned that passive benchmarks might restrict flexibility, especially during periods of high valuation and geopolitical challenges. While active fixed-income funds have historically outperformed benchmarks, results vary significantly by category according to the S&P Global SPIVA scorecard.
Adjust S&P 500 Exposure and Risk Profile
Bartolini advises that enhancing traditional portfolio design doesn’t necessitate exiting the U.S. market but rather involves exploring additional asset classes to mitigate market risks. State Street's SPDR Bridgewater All Weather ETF (ALLW), launched in collaboration with Bridgewater Associates, aligns with this strategy by investing across global equities, bonds, inflation-linked bonds, and commodities.