Asset allocation fit for a fragmenting world
Our analysis indicates that traditional 60/40 portfolios will be less able to cope with today’s new regime of fragmentation and global rewiring. We have therefore identified six actions that investors can take to make their portfolios more fit for this new environment.
- Put active management to work: Narrow market leadership and wider dispersion raise the payoff to skill. Expand manager breadth across styles and approaches to convert heterogeneity into alpha and manage concentration risk.
- Spread risk across regions and sectors: Emphasise regional and sector balance, not index dependence. Use relative value lenses and scenario context to size exposures across policy paths, sector mixes and cash flow profiles.
- Add income as a diversifier: With higher rates and likely lower equity returns, income strategies can complement exposure to equity risk premia.
- Broaden the opportunity set beyond public markets: Use private and real assets to add differentiated cash flows and access to secular themes such as AI-linked digital infrastructure, energy transition and logistics reconfiguration.
- Build defence fit for the new regime: Replace single asset ballast with layers, such as dynamic duration, selective downside protection, and unconventional sources of risk premia like absolute return and market-neutral strategies. Consider gold to help balance tail risks associated with geopolitical tension and systemic stress.
- Manage currency as a core risk lever: The dollar’s dominance may weaken, while its defensive profile is less assured. Treat currency management as an explicit dimension of portfolio risk governance. Review hedge ratios deliberately and adjust as conditions evolve.
