For years, investors have aimed to outperform the market, yet most U.S. large-cap mutual funds lag behind the S&P 500, especially after accounting for fees. The underperformance rate ranges between 80%-90% over a ten-year span. However, there's an evolving focus on creating alpha — the excess return on a benchmark — by employing diverse portfolio strategies that encompass a range of assets, from cash and bonds to commodities. Prominent asset managers, including Pimco and State Street Investment Management, have been exploring these strategies, as discussed on CNBC's 'ETF Edge' where they shared insights on achieving returns beyond the U.S. large-cap stock market.
These managers do not discount the potential of the U.S. stock market but recommend diversification, especially given current market volatility due to geopolitical tensions, macroeconomic uncertainties, and divergent interest rate policies worldwide. This traditional diversification advice could enhance returns in 2026.
Matthew Bartolini, of State Street Investment Management, observed that 2025 marked a standout year with stocks, bonds, gold, and commodities all surpassing cash in performance. He emphasized the concept of 'craftsmanship alpha' in portfolio construction as opposed to solely striving to outdo a single index.
Strategizing Cash Management
Investors should reevaluate their cash holdings. With significant assets parked in cash-equivalent accounts, slight adjustments can yield substantial returns. Bartolini suggests starting portfolio adjustments with cash by moving it into enhanced accounts for a potential increase of 1%-2% returns over typical cash holdings.
Focusing on Bonds Instead of Stocks
Pimco's Jerome Schneider suggests seeking additional returns via bond investments rather than competing with the S&P 500. Their new ETF, the PIMCO US Stocks PLUS Active Bond ETF (SPLS), merges passive S&P 500 exposure with active bond management.
Schneider forecasts robust economic growth in 2026 despite uneven sectors in the U.S. He advises considering international markets, noting diverse monetary policies from countries like Canada, Japan, Australia, and the UK as sources of value.
Securitized assets, such as agency mortgages, should be on investors' radar to diversify fixed-income exposure. Schneider argues that rigid passive benchmarks might be limiting amid current valuation and geopolitical challenges. He highlights the superior long-term performance of active fixed-income funds compared to benchmarks, although the S&P Global SPIVA scorecard illustrates mixed outcomes for bond funds.
Refining S&P 500 Exposure and Risk Management
Bartolini implies that improving portfolio structures doesn't require abandoning the U.S. market despite recent 'sell America' discourse linked to the unpredictability of U.S. foreign policy. Instead, investors should consider other asset classes to mitigate U.S. market risks. State Street's SPDR Bridgewater All Weather ETF (ALLW), developed with Bridgewater Associates, exemplifies this concept by investing in a diversified range of global equities, bonds, inflation-linked bonds, and commodities.