Full episode description:
Portfolio construction is being redefined as investors face a fundamentally different market regime. Higher inflation, shifting interest rate dynamics, and accelerating megaforces like AI and geopolitics are challenging long-held assumptions about diversification and asset allocation across capital markets.
In this episode of The Bid, host Oscar Pulido sits down with Vivek Paul, Head of Portfolio Research and UK Chief Investment Strategist at the BlackRock Investment Institute. Together, they explore why traditional portfolio construction frameworks may no longer be sufficient and how investors are adapting to a world of greater uncertainty, dispersion, and structural change. Vivek explains how megaforces such as AI investing and geopolitical fragmentation are creating unprecedented outcomes across markets, making static asset allocation less effective. He outlines why portfolio construction must become more dynamic and granular, with a deeper focus on underlying risk exposures rather than broad asset class buckets. The conversation also examines the growing importance of private markets, active strategies, and scenario analysis in navigating today’s environment.
Key themes include:
• How portfolio construction is changing in a new market regime
• Why megaforces like AI investing are reshaping capital markets
• The shift from static asset allocation to dynamic strategies
• The role of private markets and active management
• How scenario analysis is transforming long-term investing
Timestamps
00:00 Introduction
02:00 What’s driving the shift in portfolio construction
04:00 Megaforces: AI and geopolitics
06:00 Rethinking traditional asset allocation
08:00 The importance of granularity in portfolios
10:00 Diversification in a new regime
12:10 Private markets and active strategies
14:30 The total portfolio approach explained
16:10 Scenario analysis and future outcomes
18:00 Risks and maintaining structure
19:00 Key takeaways
Keywords: portfolio construction, Vivek Paul, capital markets, AI investing, megaforces, asset allocation, private markets, stock market trends, investing strategy, diversification
Sources: Rethinking portfolio construction during transformation, BII February 2026
This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener. Reference to any company or investment strategy mentioned is for illustrative purposes only and not investment advice. In the UK and non-European Economic Area countries, this is authorized and regulated by the Financial Conduct Authority. In the European Economic Area, this is authorized and regulated by the Netherlands Authority for the Financial Markets. For full disclosures, visit blackrock.com/corporate/compliance/bid-disclosures.
Oscar Pulido: Markets have entered a different kind of environment. Inflation is no longer anchored where it once was. Interest rates are higher and more volatile, and the global backdrop is being reshaped by geopolitics and rapid technological change. Taken together, these shifts are challenging some of the core assumptions behind how portfolios have traditionally been built. So, what does that mean for long-term investing? Because of the environment has changed. It's not just about adjusting expectations. It may require rethinking the building blocks of portfolios altogether.
Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.
Today I'm joined by Vivek Paul, head of Portfolio Research and UK Chief Investment Strategist for the BlackRock Investment Institute. We'll talk about what's driving this shift in markets, why the traditional approach to portfolio construction may no longer be fit for purpose and how investors can start to rethink their portfolios for a new regime.
Vivek, thank you so much for joining us on The Bid.
Vivek Paul: Thanks for having me Oscar, great to be here.
Oscar Pulido: So, Vivek, you and I speak once in a while on The Bid, and usually it's about the markets and what's going on from a market outlook perspective given that you're a member of the BlackRock Investment Institute. We've talked to your colleague Jean Boivin about the 2026 market outlook, and he talked a lot about regime shifts that we're seeing in the market.
So, let's start with the basics. What are you seeing in terms of what's changing about how investors approach long-term investing today?
Vivek Paul: I think for, generations we've had like a very structured way of thinking about long run investing, right? The idea of building a traditional strategic asset allocation, defined asset class buckets, revisiting it every few years, it was really hard to say that didn't work for the best part of, my entire career, up until the last few years.
I think the dynamic now is different. We've talked, Oscar, in the past about this being a different regime, economically. This is an environment where some of those macro anchors that we've relied upon for a generation just aren't holding in quite the same way. Think of all those things that we've just come to rely upon, like the stability of inflation, the way in which policy is conducted, on the domestic stage, on the international stage, the sort of level of indebtedness and the path of the fiscal, for many of these big governments, it's not the same environment that we have had in the past. And what that means is, we need to rethink the way in which we build those long run portfolios, and that goes across a whole number of dimensions. It's how frequently we revisit them, it's how we think about the exposures. But headline message here, I think, is that in this environment we're in, the stuff that worked well in the past just can't be relied to work well in the future.
Oscar Pulido: And just to be clear, we're saying you still need to be a long-term investor, but the type of portfolio that you build, perhaps to be a more successful long-term investor has to be revisited given the environment that we're living in. And part of the reason that those paths to the future look different is, the mega forces, which we talk a lot about on The Bid in which the BlackRock Investment Institute coined several years ago, there's two that come to mind this year that have been very front and center- artificial intelligence, and of course, geopolitical fragmentation.
Maybe talk a little bit about how these mega forces, cause you to think differently about investing for the long term.
Vivek Paul: Great question. Now, these are the two that kind of have been front and center this year, are going back a couple of years now, right? The point is the nature of the artificial intelligence megaforce is one that it is literally unprecedented. Oscar, you mentioned earlier, the 2026 Outlook. We were talking about how there was a CapEx spend when it came to AI that has just never been seen before. Literally unprecedented. Well, we're standing here number of months into this new year And all of those estimates about future cap spending has been revised upwards. So, we were already, at the limits of what we'd ever seen before and beyond, and then we revised them upwards further.
So, that's just an example of how this is an environment where there's literally no historical playbook that we can kind of anchor on. Not only that, so the magnitude is uncertain in the way I've just mentioned, but even the polarity, you don't have to go too far back to have people questioning, is AI a bubble? Is it all going to work out? and now if flip very much to the opposite in terms of the prevalent market narrative in terms of it's so disruptive in entire industries might be at risk.
So, it just goes to show that this is an environment where those mega forces, never been seen before in the way in which we're talking about them, magnitude off the charts and even direction of travel can be questioned.
And let's take geopolitics as well. when we think about the long run capital market assumptions that, BlackRock has that we ex. Explicitly develop multiple scenarios. And one of those scenarios we developed is about an AI upside, even bigger than we allow for in the sort of starting point scenario. Another one is when one in which the risk premia associated with different countries is very different because geopolitics is, again, evolving at a rapid pace. Geopolitically, we're in a world which doesn't look like it did for, you know, my childhood at least. So these are examples of things whereby it is not just that it's a bit uncertain, it's that we could be living in a completely different world from one another.
And if I can bring this right back to the point where we started in terms of portfolio construction, an average doesn't make sense, Let's say we have a scenario where there's an AI upside. Let's say we have a scenario whereby, I don't know, the United States is playing a different role in the global ecosystem. Taking an average in the middle doesn't mean anything. So, that challenges the notion of thinking about one static portfolio over the long run. It's why we need to revisit these things more frequently.
Oscar Pulido: So, you're making the point things are changing fast, you use the word unprecedented, and perhaps a more dynamic portfolio is required as opposed to a more static portfolio. So, if you're an investor and you're thinking about your portfolio, what are the right building blocks that you need to be thinking about if, for example, more traditional asset class or sector buckets no longer make as much sense?
Vivek Paul: Look, that's another key part of how we think we need to build portfolios differently. So again, let's go back to how it was, say 10 years ago, we might have been thinking about a static allocation to equity, static allocation to fixed income, maybe a slug of private markets, which I guess has been growing over time. But the point here now is that actually we need to go much more granular. So, we need to be thinking at a sectoral level, like you said, we need to be thinking about different parts of the fixed income market in terms of low duration or high duration. And the reason is that some of these mega forces we're talking about just they don't respect those traditional boundaries that we've drawn them around in, in terms of our industry, right? US Energy is going to do different things to us. Technology, they're going to do different things to European utilities and the region is part of the story, but the nature of the underlying economic exposure is also part of the story.
Let's take fixed income as well, right? The idea of thinking about short-dated duration relative to long-dated duration. That's a fundamentally different call when you think, like we do, that many developed markets are going to face fiscal pressures. And the idea that, maybe, investors demand a greater reward for investing in long-dated debt. So, it goes to show that this is an environment where you can't just think about all treasuries as if it's one, homogenous thing, we need to go more granular in order to make the appropriate investment decisions.
And the other point I'd make, which is related to this in terms of those building blocks, another way of saying what I've said is some of those traditional building blocks bring with them big implicit bets. They bring with them concentration. Think about the, typical stock indices that we have. There's a lot of concentration in terms of certain types of exposure, be that to technology, be that to AI. Take the typical fixed income building blocks A lot of duration exposure relative to where we were in the past.
Now, maybe that's fine, maybe that's how you want to invest, maybe you want to take that concentration. I don't think it's automatically a bad thing. We would actually lean more into that kind of tech story over the long run relative to where the markets are positioned but you need to own those calls. And I think that's one of the big things about building portfolios differently now. Don't just inherit some of those, positions as a result of the way in which markets are structured, explicitly own them. And this is a point whereby, you look at, the building blocks we have as an industry to build portfolios now, it's different. It's different to where it was in the past. I can pick sectors now through various different types of investments in a way I couldn't, maybe 10, 20 years ago.
So, going back to your question, Oscar, the idea of additional granularity is essential for capturing the opportunity, and it's also much easier to do now given the way in which the landscape has shifted.
Oscar Pulido: And that granularity is something that we spoke to Ibrahim Kanan about. Ibrahim runs US equity portfolios, and he talked about the concentration in the S&P 500 and the mag seven and how that is a recent phenomenon and that means that there are opportunities elsewhere in the US market to look for. And I think that's what you're saying is that ability to be granular is important when you have such a dynamic environment.
Vivek, one of the things that you and the BlackRock Investment Institute do is you look out to the long-term and you make some assumptions about where asset classes are, what they're going to do, how they're going to perform. So, how is the current environment, causing you to revisit how you make some of those long-term projections.
Vivek Paul: So, one way I'll bring this to life, Oscar is often when you're thinking about long run expectations, you need to think about what's the macro going to do? What's the relationship with asset classes and all those things that we still need to do in this environment. As I said earlier, we need more granularity, we need more scenarios, but we still need to do those things.
But another way in which I think we need to think about this is, the traditional assets that have added diversification benefits in long run portfolios, I don't think necessarily play quite the same role as they did. And it means that we need to think about that concept of diversification a little bit differently.
I don't think there are silver bullets in terms of this asset now is wonderfully diversifying in all conditions. I don't think that exists anymore. That means we need to find different sources of return. So, private markets are something that play a larger role in the portfolios that we build because you get access to a different stream of returns and different return drivers in those private markets than you might in the public markets.
And another one, is exposures that are deliberately trying to seek alpha, So, this is an environment, going back to where I started this, a new investment regime, of dispersion, of uncertainty, of macro volatility. I talked about lost macro anchors, This is an environment where we're going to see dispersion and we made the call like a few years ago, that's an environment where if you can pick skilled managers, they are able to profit from that. So, an additional layer of this portfolio construction approach is the type of exposures you're getting. So, it's not just US equity versus European equity versus fixed income, et cetera. It's, do I want to invest in those asset classes on a more active seeking basis or if you like, more into the index. And that's another point that I think we need to explicitly consider, and, in the way in which we are thinking about that we would all else equal like delve more into those active seeking strategies now than in the past because of this the regime of greater dispersion that we were talking about.
That's not to say that there's no place for those more, index-based strategies. I think they play a heavy role and would play a, an enormous role for many. But the point I'm making here is you also need to think of portfolio construction, not just in terms of where those exposures are, but the type of exposure you're getting to.
Oscar Pulido: And Vivek we're talking about regime change and these unprecedented changes in markets, and it's not just a 2026 story, I think you mentioned. This goes back a couple of years. So, the things that you're talking about needing more dynamic portfolios and more granular portfolios, how do you see investors actually adopting these changes in portfolios? Are they adopting them or are we still on a journey to see some of that adoption in portfolios?
Vivek Paul: I think they're starting to adopt them, and I think we're going to see more and more of this in the future. And, one of these phrases that I think has gained a lot of mileage in our industry in the last few months and, maybe the best part of a year is this idea of a total portfolio approach.
The idea of thinking about the entirety of the portfolio one of the things that we've spent a lot of time thinking about is, we've been evolving our own, investment process in the way in which I've just described, and there's a lot of similarities in terms of the desire as to why we've shifted our own approach with what I think investors are seeking to do when it comes to total portfolio and the thing here is that, there is no one common definition today about what a total portfolio approach means, but I think there's a bunch of things that they have in common, in terms of various definitions of them. And the first part is it's all to do with moving away from traditional static 'set and forget' strategic asset allocation.
So, I think as clear observation here, I think that sophisticated investors in the United States, in Asia, I talk to many across the world, are looking to move on from those traditional approaches. Exactly what they then do, I think is where there's a little bit more ambiguity around this notion of a total portfolio approach.
And so, to your question as to are we all the way there? I'm not sure, because I think as time goes on, people will get greater clarity as to what they themselves mean about that. But the things that I associated with that, style of investing, which is very much where we are going in terms of our portfolio construction thinking, is the idea of, looking at diversification, not from an asset class lens, but from an underlying risk exposure lens. We talked a little bit about that already. that's something that I think is consistent with many people's definition of total portfolio approach, TPA, the idea of dynamism we've talked about that's consistent with many people's definition. The idea of thinking about how each marginal investment contributes to the overall portfolio, not just within a sleeve.
So, it's not like, this stock versus that stock, it's more, what about this sector versus that sector? What about this region versus that region? What about maybe some part of fixed income rather than some part of equity because overall in the portfolio it makes more sense. That dynamic is, I think, very consistent with where we're moving towards. But to my earlier point, I don't think we're all the way there because I don't think everyone means exactly the same thing when they say total portfolio approach.
Oscar Pulido: Well, and part of the reason investors, it sounds like, need to consider all these dynamics, in their portfolios is because, we're living through some of these mega forces, and you mentioned that the scenarios that can play out with respect to artificial intelligence, both a bull case, maybe in a bear case or the way that scenarios play out in the geopolitical sphere, can look very different depending on what your assumptions are. So, talk more about these various scenarios and how these impact your investment thinking and then ultimately what you do in portfolios.
Vivek Paul: First point to make is like the obvious one, which is these scenarios that we model as part of our capital market assumptions are just massively different, right? And it's not only different in the sense of what the return expectation might be for a given asset class, but the relationship between them I think is very different.
So, let's take the scenario that we put out on our website called, AI Productivity boom. In that one, I think you see something like high teens returns from US Equity. You see that return because there's a productivity boom that manifests early. You see margins continuing to have room to expand, and in that environment you're probably in a world whereby the productivity benefits have felt really soon. So, you probably see less inflationary pressure in that world than maybe we see in the world that we are inhabiting today. If you see less inflationary pressure that probably means that there's greater scope for governments to grow their way out of their debt problems. It means maybe there's more room for rates to be cut, and you probably go back to an environment whereby you have that strong negative correlation between say, treasuries and equity, right? so that's the world, which perhaps looks a bit like the, fantastic run we had of it for a couple of decades going back in the nineties and two thousands.
Now, I flip that to the alternative scenario that we have out there where the risk premia is widening in the United States and everywhere else. So, all else equal, investors are demanding greater reward for taking the same level of risk, and in that environment it looks very different. You have returns on equities and bonds that are, are not like what we've seen. They're materially more negative you have maybe the role of the US dollar in that scenario looking like a different one to how we've come to, understand and rely upon it for a generation. And these are examples where, the environment is different and the relationship between those assets is different.
Now, Oscar, you asked a question, what do I do with this information? And I mentioned earlier I would not think about averaging across them. I don't think it makes any sense. what does it mean to probability weight things which are representing very different worlds? So, the way in which we think about it is we have these scenarios because we need to continually kick the tires on what we think is the most likely and build our portfolios according to them.
Because I would argue that none of the things I just talked to are tail risks. I don't think it's right to describe them as that. These are things that could indeed occur over the course of the coming five years. That's why my team spends a lot of time developing thousands and thousands of numbers to help our portfolio managers think through that problem. So, the way in which you use this information is to say, what would my portfolio be in that alternative scenario, how likely is that to occur? Keep that, evaluation continually being something that you tire kick and doing that helps because it means that if you are in an environment where you need to pull the trigger and move to a different portfolio, you already know what you want to do.
So that's the way I think this helps is it's, is not because you want to weight across them. I don't think that makes any sense. It's because what you want to do is know what I do in advance. If that world was to materialize.
Oscar Pulido: Vivek, when you look at those scenarios, you started to talk a little bit about one of those scenarios, which is one in which stocks and bonds don't do as well. But talk a little bit more about the risks that investors need to consider. What are some of those risks that you think they should be aware of?
Vivek Paul: I'm going to answer this question Oscar, if I can, at even bigger level here. Because I'm advocating for greater flexibility and greater dynamism and greater use of scenarios and how we think about long run allocation. Now, with all that, I guess there's the risk that actually you end up with a very unstructured process, You've got so much freedom that you're making one call here on correlations, one call there on relative probabilities and it's just a mess, right? the big risk here when it comes to investors being more granular owning all these implicit bets is to still have structure amidst that flexibility.
So, the big risk for me is that you have all the flexibility if you kind of believe what I say. And then the portfolio is just massively different one quarter to the next and you don't entirely know how you got there and it's hard to justify to a third party. So, I think the big risk is actually to come up with a coherent structure of making decisions that allow you to benefit from that flexibility without it turning into chaos, frankly. so that's what I would say.
If I deep dive into the particulars, I think the risks that we highlight are the idea that maybe inflation is still underappreciated. I think that is something that might keep pressure higher on interest rates. The idea that, term premia could come back. It's part of the reason why we'd shy away from long dated bonds. the idea that, it makes sense to think about private markets a little bit more, they're not without their own risks, but we need to think beyond the headlines that we might see in the press and to the underlying economic drivers.
So, there's a whole host of things that will always be relevant, but I think my meta answer to your question is using the flexibility to make more of the opportunity set, rather than getting into a bit of a mulch.
Oscar Pulido: Well, and we started the conversation by reiterating that long-term investing remains an important exercise. You've touched on the point that being more dynamic is going to be important when you have this kind of regime and you need to have a plan, which having a plan is part of the success of being a good long-term investor.
Vivek, you do a lot more scenario analysis than I do in my day to day, but I'm going to go out on a limb and say, there's a very likely scenario we will have you back at some point on The Bid to talk more about this topic. Thanks for talking about the markets and portfolio construction and how investors should, think about their portfolio allocations, and thank you for doing it here on The Bid.
Vivek Paul: Thanks a lot, Oscar. Thanks for having me.
Oscar Pulido: Thanks for listening to this episode of The Bid. If you enjoy the show and want to support the podcast, consider telling your friends about us or sharing an episode that really resonated with you. Make sure to subscribe to The Bid and follow us on social media so you never miss an episode.
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