A legacy under review

Consider two investment professionals with contrasting mandates. Jana, a CIO at a pension fund, oversees a traditional 60/40 portfolio. While historically effective, the model has recently shown increased volatility with limited reward.

David, managing a multi-generational family office, pursues the same goals, capital preservation and real returns, but through a fundamentally different allocation strategy.

Though illustrative, Jana and David represent a common divergence in institutional thinking: whether the 60/40 framework remains sufficient in a changing investment environment

Rising inflation, structurally lower real yields, geopolitical instability, and higher correlations between traditional asset classes have all contributed to a re-evaluation of portfolio construction. For many, the answer is not abandonment, but adjustment, a pivot toward an allocation that includes a meaningful slice of alternative assets.

One such approach gaining traction is a 50/20/30 model:

• 50% growth-focused listed equities,
• 20% core defensive bonds, and
• 30% alternative strategies, uncorrelated to public markets.

It’s not a prescription, but a provocation, an invitation to rethink how modern portfolios are built to navigate an increasingly complex world.

In a low-return environment, nominal figures often mask a deeper reality: the slow, often invisible erosion of purchasing power. A headline return of 8% might look appealing, but what remains once inflation, tax, and fees are accounted for?

In 2024, South African CPI averaged 4.4%. At the same time, money market funds returned between 7% and 8.5%, leaving investors with a real return of around 4%, before accounting for tax drag. For a retiree drawing an income or a fund manager targeting real growth, that margin is uncomfortably thin.

Government bonds, historically a mainstay for income-seeking investors, tell a similar story. Ten years ago, a 10-year RSA bond yielded approximately 8% when inflation hovered at 4%, producing a real return of about 4% or less. Today, the same instruments yield closer to 10%, with inflation closer to 3%, suggesting improved real yields. But this surface improvement belies a more volatile backdrop.

The journey to that 10% nominal yield has not been smooth. Along the way, bondholders have absorbed significant mark-to-market drawdowns, particularly during fiscal slippage episodes or when global rates repriced sharply. In some cases, the volatility risk has resembled that of equities more than traditional fixed income.

For long-term investors like Jana, this raises a dilemma: even in a higher nominal rate environment, are traditional assets delivering the risk-adjusted real returns they once promised?

In many cases, the answer is increasingly no. The challenge now lies in identifying income-generating assets that adjust naturally to inflation and interest rate movements, without demanding equity-like risk or enduring sharp repricing in volatile markets.

The past five years have brought a series of global events that have tested the foundations of conventional portfolio theory. The COVID-19 pandemic, conflict in Eastern Europe and the Middle East, and an explosion in ransomware and cybercrime have disrupted economies, supply chains, and financial markets alike.

What’s notable is not only the scale of these disruptions, but the way they bypassed traditional diversification defences. Assets once considered reliable hedges, like bonds, often fell in tandem with equities during stress events. In 2020 and again in 2022, correlation creep erased many of the diversification benefits that investors had come to rely on.

These events, once considered rare, now feel more frequent. They represent a shift from isolated ‘black swan’ anomalies to a more complex mosaic of systemic risk. Investors must now consider a broader range of uncertainties: the speed of rate policy changes, fragility of global trade infrastructure, and the vulnerability of financial systems to cyberattacks.

The traditional 60/40 portfolio was not designed for this environment. That’s not to say it no longer works, but rather that it may no longer be sufficient, especially for those seeking consistent real returns and capital stability over long periods.

This is where investors like David have begun to diverge. Their portfolios have adapted, not through radical repositioning, but by introducing select exposure to alternative assets, particularly those with built-in inflation resilience, contractual cash flows, and low sensitivity to global equity or bond market swings.

In portfolio theory, diversification is meant to reduce risk without compromising return. In practice, however, asset classes often become more correlated just when diversification is most needed. Over the past decade, equities and bonds, once reliably uncorrelated, have increasingly moved together during periods of stress, challenging the effectiveness of the 60/40 portfolio.

At BC Funding Solutions (“BCFS”), we decided to put the traditional portfolio to the test—carving out a 30% slice and reallocating it to a well-structured alternative and the results speak for themselves.

From January 2019 to March 2025, David’s revised portfolio achieved a cumulative return of 78.4%, translating to an annualised return of 9.31%. Jana, who remained fully invested in a traditional 60/40 model, posted a cumulative return of 43.76% over the same period, an annualised 5.74%.

The headline numbers are meaningful, but the story becomes even clearer when risk is factored in. Measured by the Sharpe ratio, a standard metric for return per unit of volatility, Jana’s portfolio produced a score of -0.54 while David’s delivered 1.21.

This suggests that the higher return didn’t come with more risk, it came with better risk. The portfolio wasn’t just more profitable; it was more efficient.

David’s allocation wasn’t built on aggressive leverage, esoteric instruments, or speculative growth stories. Instead, it relied on contractual income from a legally protected, real-economy sector. In doing so, it created a return stream that operated independently of daily equity swings or interest rate shocks.

In many ways, it was a rediscovery of what alternatives were meant to be—not exotic sidelines, but resilient core complements to traditional holdings.

At the core of David’s allocation was a strategy structured by BCFS, South Africa’s leading lender to community schemes comprising of bodies corporate and homeowners’ associations. The Fortified Capital Plus (“FCP”) structure doesn’t chase venture capital headlines or promise exits based on elusive tech multiples. Instead, the structure is anchored in enforceable legal claims, arrear levies owed by unit owners, which community schemes are required by law to recover.  As a result, FCP’s underlying assets offer a rare combination of priority ranking, legal clarity, and a high degree of recoverability.

While traditional credit strategies often hinge on corporate earnings and or macro cycles, the FCP structure takes a more grounded approach. Every loan is assessed to minimise repayment risk, whilst aligning to the needs of the borrower. Community schemes, by their nature, must maintain the integrity of their common property, and levy contributions are not optional. This makes the underlying cash flows less sensitive to market mood and more tethered to recurring household commitments.

That allows the FCP structure to deliver floating-rate, inflation-aware returns through real-economy exposure. The result is gaining exposure to an asset class that doesn’t just cushion volatility but helps reset the investor’s expectations entirely. David’s portfolio wasn’t insulated from public markets because it was clever, it was resilient because it was intentionally uncorrelated.

Every loan that BCFS originates stems from a legally binding resolution passed by a community scheme. These resolutions, adopted by trustees or members at either general or special meetings, are not informal commitments; they’re enforceable obligations under South African sectional title legislation.

In the case of arrear levy funding, repayments are not tied to future budgeted levies, instead loans are repaid through the recovery of unpaid levies, which are legally due and enforceable. In contrast to typical corporate or SME credit, where repayment depends on business success or goodwill, these loans are embedded in statutory obligations linked to property ownership.

One of the most misunderstood advantages in this space is the legal ranking of community scheme levies. In South African law, unpaid levies rank ahead of mortgage bonds on the same property. If a unit owner defaults, the body corporate (and by extension, the loan funder) has a superior claim to proceeds from any property sale. For lenders, this creates a quasi-collateralised structure, without the complications of registering mortgages.

Additional safeguards include:

• Cession of levies and bank accounts, ensuring that loan repayments are contractually prioritised and traceable.
• Access to structured enforcement mechanisms, supported by South African legislation, to uphold payment continuity and reduce credit risk in cases of arrears.

This combination of statutory prioritisation and active monitoring gives the FCP portfolio a structural resilience that is rare in the lending space, let alone in the broader alternative asset universe.

Liquidity is one of those features investors often notice too late, not when they enter a position, but when they try exit.

In the traditional view of investing, higher returns often demand one of two sacrifices: more risk or reduced access to their invested capital. Many private market products make this trade explicit. A private equity fund might promise 25% IRR, but only after five to seven years. SME lending platforms and property development notes can offer mid-teen yields, but with liquidity dependent on construction milestones, refinancing events, or manager discretion.

These structures suit some investors, but not all. For many, the ability to access capital with reasonable notice, without sacrificing institutional rigour, is just as valuable as the return itself. For many investors, especially those building liquidity buffers or balancing short- and medium-term liabilities, access matters as much as outcome.

Let’s consider how the FCP structure compares with other popular alternatives in the South African landscape:

The FCP structure doesn’t compromise on governance. The portfolio remains actively monitored and governed by an internal credit committee. But unlike other high-yielding instruments, FCP is not dependent on physical property sales or refinancing cycles to honour redemptions. Instead, cash flows are generated through the recovery of unpaid levies. While inherently less regular than scheduled amortisations, these flows are supported by statutory protections and have proven stable over time.

The familiarity of the 60/40 split, still serviceable but increasingly strained under the weight of low real returns, unexpected correlations, and prolonged volatility. Alternatives are becoming increasingly popular, not as a gamble, but as a strategy.

That’s where the Fortified Capital Plus strategy stands apart.

It doesn’t ask investors to chase returns in distant geographies or speculative themes. It offers something closer to home, literally. It backs the kind of real-world infrastructure we all rely on such as working lifts, watertight buildings, solar panels, and sustainable cash flows from South Africa’s residential ecosystem. All underpinned by law, governed by trustees, and monitored by a credit team that has spent two decades building trust in the community schemes sector. As capital markets evolve, portfolios must evolve with them. The modern investor’s challenge is no longer just growth vs. safety—it’s correlation vs. independence, volatility vs. consistency.

Rethinking your current allocation and seeking something that offers better return for your risk, a stronger Sharpe ratio, a more resilient asset class, a deeper legal foundation, might not just be the smart move. It might be the necessary one.