In an investment landscape undergoing profound structural shifts, a multi-asset approach is gaining increasing merit. Beyond the traditional rationale of diversification, multi-asset strategies offer the flexibility to navigate markets without the constraints of rigid benchmarks.
The era of US dominance has long been a cornerstone of global portfolio construction. However, that position is being tested as shifting economic, geopolitical and valuation dynamics prompt investors to reassess their assumptions about risk and returns. This regime change calls for a more dynamic and unconstrained approach to asset allocation. One that can identify genuine diversifiers and adapt to evolving correlations between assets, inflationary pressures and policy changes. In this environment, asset allocation is not just a risk management tool, it can also be a source of return, requiring agility, insight and a willingness to challenge traditional portfolio norms.
- For equities, the diminishing dominance of the US invites a more global lens, as select international markets offer a combination of compelling valuations and structural growth.
- Credit markets, meanwhile, present nuanced opportunities as dispersion increases, particularly in areas like high yield and emerging market debt, where active selection can add value.
- Alternatives continue to play a vital role as genuine portfolio diversifiers. With low correlation to traditional equities and bonds, they can help enhance durability, particularly in volatile market conditions.
- In currency markets, the changing of the guard is creating volatility and divergence that can be harnessed both for tactical positioning and portfolio hedging.
Evaluating equities
Since April’s ‘capitulation day’, when sweeping tariff proposals triggered a wave of selling, the S&P 500 Index has staged its fastest rebound since the Covid-19 sell-off. However, market leadership remains narrow, with the top 10 stocks accounting for around 40% of market cap and approximately 30% of earnings. A measured pause may follow as markets digest higher tariffs and recalibrate their expectations for growth. Any pullbacks could be shallow as earnings remain solid and capital expenditure is disciplined.
Technology, particularly artificial intelligence (AI), remains a compelling structural theme. However, echoes of the dot‑com era and the need for companies to prove they can make money mean that near‑term caution is warranted. Enthusiasm has channelled capital into a concentrated group of mega-cap companies, lifting valuations and heightening the risk of setbacks if investor sentiment turns or they fail to deliver. As with previous resets, leadership is unlikely to be uniform. The winners tend to be the suppliers that enable the new technology and the device platforms best suited to access it. Businesses that recognise the change early and either adapt effectively or are purpose‑built for the new regime should also do well.
Financials remain attractive. Higher interest rates have boosted margins and earnings and, even as rates fall, the sector still offers value, provided the economy avoids a sharp slowdown. Lower interest rates, meanwhile, can spur credit growth, enhance asset quality and support fee income. Strong balance sheets, attractive valuations and healthy dividends add further appeal. Furthermore, US financials stand to benefit from deregulation, while strengthening fundamentals support the European banks, which remain largely shielded from cross-border tariffs.
AI and financials are certainly compelling investment themes and, within portfolios, they complement more income-oriented companies with robust balance sheets and attractive dividends in other sectors. Value stocks with strong fundamentals can offer stability, while companies with consistent earnings, financial strength and positive market momentum can support performance in uncertain markets. Combining exposure to these themes with disciplined factor-based investing helps build portfolios that capture structural growth while mitigating broader market risks.
Flexibility in fixed income
Investment grade credit spreads are currently tight, making valuations less attractive. However, the market has shown resilience despite multiple economic challenges. With limited protection if the economy deteriorates or interest rates rise again, investors are clearly biased toward short-duration, higher-quality bonds, particularly from less economically sensitive or tariff-sensitive sectors.
Turning to high yield, the market is supported by stable fundamentals and low default risk. While the financial strength of some companies may have softened from previous levels, it still remains healthy by historical standards, with most issuers maintaining solid balance sheets. Tariffs and economic uncertainty pose risks, particularly for more exposed sectors, but overall fundamentals are intact. Again, spreads are tight, and gains are unlikely without a market trigger or shock. For now, the main appeal of high yield is its attractive income and steady returns, which can persist if market conditions stay supportive and the economy doesn’t deteriorate significantly.
Further afield, selected emerging market debt (EMD) can offer an attractive yield premium over developed markets, with short-duration exposure presenting the best balance of risk and reward. Emerging markets are generally in better shape today than in previous cycles, with healthier current account balances and lower inflation. Despite tighter spreads, several economic tailwinds support the asset class. The Federal Reserve’s shift toward rate cuts helps ease the debt servicing pressures on EM sovereigns, while a weaker US dollar improves the outlook for dollar-denominated issuers. Healthy external balances across EM markets provide a buffer against funding shocks and volatility, reinforcing the case for EMD as a source of diversification and returns.
The appeal of alternatives
Listed real estate (REITs)
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Offers liquid and diversified exposure to high-quality global property. From offices and retail to datacentres, REITs enable targeted positioning across regions and sectors. With average dividend yields around 4%, they provide attractive income supported by inflation-linked leases and stable cash flows. In addition, REITs tend to perform well in a falling interest rate environment, as lower borrowing costs support expansion and refinancing. Investors are increasingly turning to REITs as a vehicle to access high-quality assets. They are attractively valued compared to broader equities. In addition, historically low allocations by investors suggest scope for valuations to rise and renewed capital inflows, particularly into institutional real estate portfolios. Choosing the right regions and understanding each market’s sub-sectors are crucial in identifying winners with quality management and strong balance sheets, for example, in logistics, offices and datacentres. |
Renewable energy
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Companies that primarily invest in operational wind and solar assets often have attractive, inflation-linked cash flows. In recent years, the UK investment trust sector has been impacted by interest-rate volatility, below-target energy generation and fluctuating power prices, resulting in lower valuations and poor performance. Many of these companies also rely on subsidies, typically around 60% of annual income, which are set to expire between 2032 and 2035. Without these subsidies, revenues will become more volatile. They will also lose their direct link to inflation and be increasingly exposed to market pricing. To mitigate this risk, many funds are entering into corporate Power Purchase Agreements (PPAs) to replace fixed-revenue streams. Although the end of subsidies reduces revenue, lower interest and debt repayments partially offset it, so the impact on cash flow is less severe. For now, these renewable energy companies remain attractive investments with dividends averaging over 9%, well above bond yields, and trading at a significant discount. Dividends are still cash covered, and the sector stands to benefit from the global shift toward cleaner energy and greater energy security. While both wind and solar are essential to the energy transition, listed solar companies currently show stronger momentum and may offer more attractive near-term, risk-adjusted returns. However, a balanced mix of wind and solar assets helps stabilise generation and reduce weather-related risks. |
Infrastructure
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Offers investors access to an alternative asset class that has low correlation to traditional equities and bonds. These assets typically provide inflation-linked, contractually backed income, attractive initial yields, and resilience through economic cycles thanks to long-term agreements or regulatory frameworks. Investing in global infrastructure is a structural megatrend, fuelled by demographic shifts, government spending and the ongoing drive to strengthen economic foundations.
An accessible way to invest in infrastructure is through listed infrastructure equities and UK investment trusts. These listed infrastructure equities combine defensive characteristics with income generation and exposure to long-term growth. Utilities, power transmission and transport networks are all typically underpinned by long-term contracts or regulations, offering steady, inflation-linked income. Infrastructure investment trusts offer similar characteristics, as they own operational assets and that can deliver attractive, inflation-linked dividend yields. After two years of pressure from rising bond yields, the sector is seeing some recovery. Even so, shares are still trading at double-digit discounts. |
Currency is a crucial source of returns
Currency exposure in multi-asset portfolios is often overlooked, yet it can be a key source of both risk and return. As investors diversify globally, foreign exchange (FX) risk becomes unavoidable and can materially impact performance, especially when the economic environment is volatile. However, active currency management allows tactical positioning based on economic trends, interest rate differentials, and geopolitics. At the same time, the currencies themselves can serve as diversifiers during periods of equity or credit market stress. In today’s landscape of diverging growth, shifting monetary policy, and geopolitical uncertainty, FX strategy is a core part of asset allocation, offering both defensive and opportunistic tools.
The US dollar, while still the dominant reserve currency, is losing its reliability as a safe-haven asset. Fiscal deficits, policy uncertainty and shifting global capital flows are undermining its defensive appeal. The US dollar may increasingly serve as a pressure valve for global investors, as trust in US leadership and institutions erodes under President Trump. Selective EM currencies, meanwhile, offer an attractive mix of diversification and return potential. Though they come with higher volatility and political risk, carefully chosen EM currencies, such as the Indian rupee or Brazilian real, can provide attractive income from interest rate differentials, and help enhance returns.
A convincing case for multi asset
In today’s rapidly shifting investment landscape, the case for multi-asset portfolios is strong.
Diversification remains key to achieving better risk-adjusted returns, especially when adopting a global, unconstrained approach.
Looking beyond benchmarks helps uncover true diversifiers across geographies, sectors and asset classes. However, a successful multi-asset strategy must also strike a balance between flexibility in responding to changing conditions and the discipline to cut through short-term noise. This agility and conviction are vital in a world of shifting correlations between assets, less reliable safe havens and fluid economic conditions.
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