However, the table also shows that the two multi-asset portfolios still provide risk reduction benefits over a 100 per cent equity portfolio.
Investors would, therefore, still receive some downside risk protection when compared to an equity portfolio.
However, returns of the multi-asset portfolios have not increased - it looks as though investors will lose their free lunch.
So have we found proof that “the only thing that goes up during a crash is correlation”?
Let’s look at weekly data for: MSCI ACWI (global equity), EPRA NAREIT (property), Iboxx Sterling Corporate Bonds and Citi World Government Bond index.
Correlations for the 10 years covering July 2007 to July 2017 are as follows:
We would expect to see these correlations increase if we look at the two-year period covering the global financial crisis from July 2007 to July 2009.
While this is true for the relationship between equities and property (0.87 rising to 0.91), it is not the case for the other asset classes, where correlations are actually lower.
It’s important to remember that different periods of market stress have been caused by a wide range of factors.
This could lead to different outcomes, depending on what has caused the market reaction.
Also, while this small group of asset classes does not represent the full range of asset classes available to the multi-asset investor, it does show that not all correlations necessarily go up during periods of market stress.
This is an important consideration for the multi-asset investor.
We saw earlier that increasing the correlations between asset classes would lead to an increase in portfolio volatility.
Also, we earlier stated that as correlations reduce, the diversification benefit increases.
So, maybe the free lunch is still on?
Robert Wakefield is a product specialist, multi-asset at HSBC Global Asset Management