The time has come to break investment tradition

We’re also looking outside of developed markets and venturing east. For investors willing to jump that geographical hurdle, you can find that Asian companies of equivalent credit quality to their US counterparts and issued in the same currency offer 4% more per year on their debt — and in a faster growing economy. We’re currently accessing this opportunity with UBS through Asian high-yield corporate bonds. 

Achieving better balance 

A genuinely diversified multi-asset portfolio has a much clearer role in today’s prevailing environment of low bond yields, negative debt piles and returning inflation.

To improve diversification, we believe investors should look to break with tradition even further and incorporate a wider range of assets to achieve the balance across portfolios that bonds used to provide.  

In line with this, we are strategically using more liquid alternatives, higher weights towards emerging markets and more diversified credit exposures, for example, to provide a better overall risk/reward profile.

For a balanced portfolio, we would currently expect to see an allocation of circa 15% in alternatives, a split which will likely only increase over time, given the trajectory of equity markets and traditional bond yields. 

It’s important to remember, however, that breaking from tradition does not mean just buying assets exposed to more risk. To stay true to risk mandates, investors cannot simply pile into equities instead of cash, or just load up on low-quality credit to beat inflation.

The opportunities noted above offer examples of pockets of value we can look to take advantage of. However, in the same way we don’t believe that moving up the risk ladder in regards to corporate bonds offers much by way of yield to counter inflation, we also don’t think that alternatives such as private equity will suit many portfolios, given this is simply leveraged equity.  

Instead, for investors seeking balanced portfolios, we look at options such as absolute return vehicles, which can generate 3–4% per year. One example is a mergers and acquisitions-focused strategy that has been benefitting from a post-Covid resurgence in corporate activity — we do this via the BlackRock Event Driven Fund. 

In a world of rising inflation, trend strategies that can capitalise on rising commodity prices and increasing yields are a useful exposure for portfolios to access. One fund we like here is the AQR Managed Futures Strategy. 

The reality is that we are living in a world where it is much harder to invest. But for those willing to look for it and to break from the conventional 60/40 split, there are opportunities both within the world of fixed income and beyond.