Rethinking diversification
In today’s market landscape, traditional diversifiers like bonds no longer provide the same steadying effects to portfolios. Investors need a new approach to diversification1, layering different strategies to build resilience when shocks occur.
The new normal
At the heart of asset allocation lies the textbook inverse relationship between equities and bonds - when shares go down as company prospects deteriorate, investors often turn to bonds in search of safer assets.
We believe this relationship has fundamentally shifted; less stable correlations undermine the diversification benefits the two core asset classes provide each other. Today’s alignment between stocks and bonds, as shown in the chart below, reflects deeper structural forces: persistent inflation, policy action and fiscal imbalances.
We think this environment calls for a new and different approach to diversification - investors need to be more active in how and where they diversify. By considering different strategies that work across market scenarios, and being ready to pivot when circumstances evolve, portfolios can adopt more resilience in the new investing world.
Source: Morningstar data, as of Dec. 11, 2025. The 2, 5, 10 and 30 are the tenors of Treasuries. 2-year, 5-year, etc. The correlation shown here is the rolling 20-week correlation with the S&P 500 index and the Bloomberg US Generic Govt 2 Year, 5 Year, 10 Year, and 30 Year calculation. Correlation is a statistical measure of how two variables move in relation to each other, ranging from -1 (perfectly negative correlation) to 0 (perfectly uncorrelated) to 1 (perfectly correlated).
BlackRock’s diversification toolkit
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Source: BlackRock, Bloomberg, as of 30 November 2025. The bars show the total returns in local currency terms, except for currencies and commodities, which are spot returns. Developed market equities is represented by MSCI World ex AustraliIndex (AUD), Australian equities by S&P/ASX 300 Index, US equities by S&P 500 Total Return Index, Japanese equities by Nikkei 225 Index, European equities by EURO STOXX 50 Index, Emerging market equities by MSCI EM Emerging Markets IMI Index, Chinese equities by CSI 300 Index, GREITs by FTSE EPRA Nareit Developed ex-Australia Rental AUD Hedged Net Tax Index, Global listed infrastructure by FTSE Developed Core Infrastructure 50/50 100% Hedged to AUD Net Tax Index, Australian nominal bonds by Bloomberg AusBond Composite 0+ Yr Index, Australian inflation-linked bonds by Bloomberg AusBond Infl Govt 0+ Yr Index, Global aggregate bonds by Bloomberg Global Aggregate Index (hedged AUD), Global high yield by Markit iBoxx Global Developed Markets Liquid High Yield Capped Index(AUD Hedged), EM debt by J.P. Morgan EMBI Global Core Index(AUD Hedged), Cash by S&P/ASX Bank Bill Index, Commodities by Bloomberg CommodityIndex Total Return, Gold by XAU/USD, Iron ore by Historical TSI Iron Ore CFR China 62%, and Oil byWTI Crude Oil. Past performance is not a reliable indicator of future performance. Indexes are unmanaged and one cannot invest directly in an index.
Gold’s low correlation to global and domestic shares2 has seen its popularity soar as investors search for a safe haven amid political uncertainty, stretched equity valuations and concerns around the outlook for the US dollar.
Source: BlackRock, Bloomberg as of 31 May 2025. Global equities represented by MSCI World Index. Global listed infrastructure represented by FTSE Developed Core Infrastructure 50/50 Index.
The chart shows the degree to which listed infrastructure outperformed or underperformed the MSCI World Index in each quarter. The dotted line represents the average outperformance over the entire period.
Listed infrastructure is becoming a core allocation of choice for Australian investors looking to build resilient portfolios. Historically, infrastructure has delivered outperformance and stable cash flows in times of market stress.3
Source: MSCI as of 8 July 2025. Based on comparative net performance in US dollars from MSCI World ex Australia Index peak to trough during the 4 biggest corrections in the MSCI World ex Australia Index over the past 20 years. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance and simulated past performance is not a reliable indicator of future performance.
Minimum volatility investing aims to provide equity investors with a smoother ride through a portfolio of shares that exhibits less swings — up or down — than the market. By capturing only around 65% of market downside4, minimum volatility ETFs may help to shield portfolios, allowing investors to stay in equity markets during times of stress rather than pivoting to cash and missing out on potential market rebounds.
Investors are increasingly turning to liquid alternatives such as hedge funds for stability, liquidity, and uncorrelated return potential, with 1 in 10 BlackRock APAC clients looking to increase their hedge fund allocations in 20265. Balancing defensive exposures between alternatives and fixed income can help growth-focused investors achieve better returns over time.
