There's a new idea of alpha in the market that big fund managers are pursuing

• Managers recommend reducing U.S. large-cap equity exposure from 80% to 70-75% of portfolios, adding real assets like gold (which had its best return since 1979 in 2025) and inflation-linked bonds where clients are 'structurally underweight.'
• Enhanced cash management and active fixed income strategies can generate 1-2% additional returns versus traditional accounts, with divergent global monetary policies creating relative-value opportunities across countries from Canada to Japan.
• Small-cap stocks have outperformed large-caps since mid-2025, with the Russell 2000 up nearly 9% year-to-date and doubling the S&P 500's return over the past six months, while 70% of international stocks beat U.S. markets in 2025.

Market Summary: Portfolio Construction Alpha Strategy Gains Traction

Key Concept

Major asset managers, including Pimco and State Street Investment Management, are promoting "portfolio construction alpha" or "craftsmanship alpha"—generating outperformance through diversified asset allocation rather than traditional stock picking. This approach targets investors with U.S. large-cap equity-heavy portfolios (often 80% allocation).

Key Data Points

• Stock picker failure rate: 80%-90% of U.S. large-cap mutual funds underperform benchmarks over a decade
• 2025 milestone: First year since 2019 that stocks, bonds, gold, and commodities all outperformed cash
• Enhanced cash returns: 1%-2% additional yield available versus traditional cash accounts
• Small-cap outperformance: Russell 2000 up ~9% in 2026 YTD versus flat S&P 500; doubled large-cap returns over past six months
• International performance: 70% of international stocks beat U.S. market in 2025
• Gold: Best return since 1979 in 2025

Investment Strategy Recommendations

1. Optimize cash holdings: Move from cash-equivalent accounts to enhanced cash strategies
2. Fixed income focus: Utilize active bond strategies, including securitized assets and agency mortgages; leverage divergent global monetary policies
3. Modest rebalancing: Reduce U.S. large-cap allocation from 80% to 70-75%
4. Diversify into underweighted assets: Add commodities, precious metals, inflation-linked bonds, and small-cap equities

Market Context

Strategy responds to geopolitical uncertainty, divergent global central bank policies, and late-cycle valuation concerns. Experts emphasize rotation rather than wholesale U.S. asset sales, with Russell 2000, gold, and Bitcoin all hitting record highs recently.

Products Mentioned

• PIMCO US Stocks PLUS Active Bond ETF
• SPDR Bridgewater All Weather ETF