Investment Strategies

Multi-Asset Diversification: A Nice to Have Is Now A Need to Have

Joseph Burns October 27, 2020


The author of this article argues that when analyzing markets today, the value of diversification is clearly on a cyclical upswing. Historically, these shifting asset class cycles often last for years.

Diversifying assets is one of the oldest risk management strategies there is. Even though low/negative bond yields have removed forms of fixed income from the diversification toolkit, traditional ways of setting up a portfolio still deserve respect. And in this article, from Joseph Burns of iCapital Network, the case for diversification is given a fresh look. (Details on the author are below.) iCapital - which  made important new appointments this week - has a platform for alternative assets such as private credit, debt and infrastructure. Such “alternatives” can be less liquid than more conventional assets such as listed equities, and any view of diversification must take differences in liquidity into account. (See more on latest story about the hires.)

The editors of this news service are pleased to share these views; the usual editorial disclaimers apply. Jump into the debate! Email and

Nobel Prize winner Harry Markowitz once famously referred to diversification as “the only free lunch in finance.” His message was simple and timeless: by allocating capital across a mix of assets, clients can increase the probability of realizing their targeted return over time, with an acceptable level of portfolio volatility.

One of the many challenges for investors is that the benefit of diversification does not really have a constant value. Multi-asset, multi-strategy hedge funds can play a pivotal role in achieving positive results for clients, though there have certainly been periods when diversification can be structured without the benefit of alternative investments. The decade following the Great Financial Crisis is a case-in-point regarding how investors achieved sufficient diversification somewhat simplistically, through a basic “set it and forget it” allocation to public equities and traditional fixed income.

From March 2009 through year-end 2017, $1 million invested in the S&P 500 Index grew to $4.4 million. During that period, fixed income, as measured by the Bloomberg Barclays US Aggregate Bond Index, provided investors with an annualized return of +4 per cent without ever experiencing a loss of -4 per cent. So the return-generating and capital-protecting components of a portfolio were readily available through a stock-bond allocation. But what about the final ingredient of sound portfolio construction: diversification? Did investors achieve high returns, capital protection, AND portfolio diversification through a standard asset allocation?

The answer is a resounding yes. When looking at the 11 months during that time period when the S&P 500 Index declined by at least (-3 per cent), fixed income was positive 10 times - only August 2015 broke the trend with a negative return for bonds of just 14 basis points. The average S&P performance for these “negative equity” months was approximately (-5 per cent), compared with an average gain of +1.2 per cent for fixed income (Exhibit 1).

Source: eVestment, as of September 30, 2020. For illustrative purposes only. Past performance is not indicative of future results. 

Something has fundamentally changed over the past few years however, with respect to the “negative correlation” between stocks and bonds. Since 2018, the S&P 500 Index has had seven months with losses exceeding (-3 per cent). However, bonds were positive just three times - and negative four times - as shown in Exhibit 2.

Source: eVestment, as of September 30, 2020. For illustrative purposes only. Past performance is not indicative of future results.

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