The traditional 60/40 portfolio is set to return just a half-point of real return per year over the next decade, according to Research Affiliates.

In a new report, Chris Brightman, Research Affiliates’ chief investment officer, warns that a conventional portfolio of 60 percent in the S&P 500 and 40 percent in the Bloomberg Barclays Aggregate Bond Index is priced to yield a real return of only 0.5 percent based on current yields and anticipated reversions to normal valuations (from November 2017 levels).

Research Affiliates, which subadvises the PIMCO All Asset and All Asset All Authority funds, still sees favorable estimated returns from both developed non-U.S. and emerging markets, with 10-year annualized real return estimates of 4.5 percent and 5.9 percent,  respectively. Those returns are based on current yields, valuations and estimated appreciation of foreign currencies against the dollar.

“Our preference for [foreign markets] is now less about undervaluation in those markets and more about the benefits of currency and income against the backdrop of what we view as rich U.S. equity markets,” said Jim Masturzo, senior vice president of asset allocation.

The new tax law could help U.S. corporate profits, Masturzo added, but maybe not as much as some think. For one thing, the actual tax rate among S&P 500 companies is reportedly much lower than the top-line corporate rate of 35 percent, and any additional profits accruing from the law could be a catalyst for a bump in wages, which could eat into profits.

Among global bond markets, Research Affiliates likes unhedged emerging market debt and local currencies.

“We view these assets as attractive due to their high real yields and the potential for currency appreciation, and their foreign currency denomination insulates them against inflation in the U.S. dollar,” said Shane Shepherd, director of research.

The firm’s 10-year estimates for emerging markets local currency returns are 3.5 percent net of inflation, and 3.8 percent for debt, driven by an estimated 1.7 percent annual appreciation in emerging-market currencies.

Bank loans are another bright spot, priced to deliver a 1.7 percent real return over the next 10 years, Shepherd said.

With credit spreads already tight, U.S. investment grade debt is forecast to return just 1 percent and high-yield bonds 1.5 percent.

The All Asset funds do hold U.S. Treasuries, but just as a hedge. Short Treasuries are expected to return 0.2 percent annualized on a real basis over the next 10 years, intermediate Treasuries 0.6 percent and long bonds -0.8 percent.