In today’s volatile markets, diversification requires new tools

  • Conan McKenzie

Capital at risk. The value of investment and the income from them can fall as well as rise and are not guaranteed. The investor may not get back the amount originally invested.

Multi-asset investing is about owning different asset classes at the same time. This much seems obvious. It has tended to work because equities and bonds have moved in different ways. While one zigs, the other might zag.

The start of 2022, however, has posed a challenge to this principle as correlation between equities and bonds (i.e., the degree to which they move in relation to one another) has moved higher and crossed into positive territory.*

So, what can we, as multi-asset investors, do when equities and bonds are moving down in sync, and it seems like there is nowhere to hide?

Today’s market environment calls for a different approach to diversification – one that includes seeking out asymmetric sources of return (i.e., investments where potential upside is greater than potential downside) through a blend of directional and alternative hedging strategies. We need to be agile and precise in the expression of our views to deliver outcomes to clients.

Our broad investment universe affords us the flexibility to look beyond traditional equities and bonds and explore alternative investments like real estate and infrastructure. In real estate, we have identified opportunities to invest in social housing assets via real estate investment trusts (REITs). We also favor investments in renewable energy infrastructure. Both asset classes have historically exhibited low correlation to traditional assets and may also perform well in an inflationary environment.

Read the full report for more

Conan McKenzie, CFA
Portfolio Manager,
BGF ESG Multi-Asset Fund

* Source: BlackRock with data from Refinitiv Datastream, as of 24 May 2022.

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