Theme 5: Diversifying beyond the 60:40 portfolio

In a changing environment requiring a review of portfolio construction and diversification, consider alternative assets and solutions which generate returns, reduce risks and provide a hedge against inflation.

Diversifying beyond the 60:40 portfolio

The changing environment requires us to review how we construct and diversify our portfolio. Long-term inflation levels and volatility could remain high or increase more than the last 20 years. Furthermore, we can no longer assume that the correlation between long-term sovereign bonds and stocks (i.e. their reciprocal behaviour) will remain negative. Inflation is eroding investment returns, and hedging inflation volatility has become a new priority.

If the diversification benefits of bonds are lower in the future than over the past two decades (especially when equities fall), investors will need to consider which asset classes can really provide additional diversification to broaden and optimise their portfolio. In an ever-changing world, we like trend-following strategies, commodities and market-neutral strategies which generate returns, reduce risks and provide a hedge against inflation.