#Market Strategy — 26.01.2021

Constructing a new diversified portfolio for a changing world

Investment Themes 2021



Traditionally, the optimal portfolio is composed of 60% equities and 40% bonds. However, bond yields are now so low that they are increasingly losing their role as an offset when equity markets fall. It is therefore necessary to add one or more other asset classes to this traditional mix in order to increase the expected return without raising the level of risk.


This theme is aimed at investors with a defensive or even moderate risk profile wishing to build up a portfolio, or adjust an existing portfolio, in order to adapt it to the current market environment of low interest rates.

The proposed diversifiers have little or no correlation to equity markets on a historical basis. However, they can be volatile and therefore require an investment horizon beyond 12 months. 


Seeking better diversification


The optimal portfolio for the long-term investor should be well-diversified. It is traditionally composed of 60% equities and 40% bonds. This portfolio rises thanks to the equity allocation when markets rise, while the fixed-income allocation helps mitigate the decline in more challenging times. That said, the fall in bond yields over the past 40 years challenges this theory. Indeed, it is increasingly difficult for bonds to play their role of shock absorber with such low yields. The Bloomberg Barclays Global Aggregate USD Index that is composed of developed and Emerging Market government and corporate bonds sat at an average yield of only 0.86% as at 8 December, down almost consistently since its creation in 1990 when it was flirting with the 10% threshold.



We thus need to rethink this optimal portfolio


Adding to the equity allocation would certainly increase the desired return, but the level of risk too, so that is not an appropriate solution. As a result, one or more asset classes need to be added in order to strengthen the role of the fixed-income allocation and diversify further. These assets must be decorrelated from equity markets, or even better, inversely correlated to equity markets. The aim is for them to appreciate when equity markets fall.



Consider adding a diversifier


We think of gold, precious metals and the yen, which are all safe havens par excellence, and tend to appreciate during economic crises. Therefore, they make it possible to diversify the portfolio and thus improve the risk/return ratio.

US inflation-linked bonds may also be added. Their historical correlation to US and European equity markets is negative. Moreover, inflationary pressure could start to build up in the US if the economic recovery is stronger than expected, as the US Federal Reserve has injected billions of dollars into the economy and vowed that it would not raise its key interest rates at the first signs of inflation.

Finally, we should consider alternative funds, i.e. investment strategies which are uncorrelated to equity markets. We particularly like Global Macro hedge funds and private equity. The former could benefit from deglobalisation and differences in fiscal policy between countries. Private equity funds make it possible to invest in the real economy, specifically in unlisted companies at different stages of their growth, in Europe, the US and Asia. These funds cover a range of strategies, including leveraged buyouts, growth, mezzanine and secondary. 

In addition, the infrastructure funds asset class has been growing for ten years. These funds invest in infrastructure in various fields: transport, environment, social, energy, health care, etc. They also offer stable and attractive long-term returns, with the MSCI World Core Infrastructure Index delivering a 3.4% dividend for a historical yield volatility of 14.5%, in other words lower than for equity markets. Some infrastructure funds focus on regular income distribution while others concentrate on capital appreciation.

Finally, real estate is an alternative solution for investors seeking recurring income. The Covid-19 crisis has sent structural shockwaves through the sector (e.g. teleworking and e-commerce), but share price corrections already largely reflect this. The stubbornly low interest-rate environment continues to offer major support for real estate investments. That said, it is important to diversify investments within real estate assets. 


  • Commodity prices can be volatile. A medium- to long-term investment is therefore recommended.
  • Unlisted assets may be illiquid and require an investment over several years.
  • US inflation-linked bonds are less liquid than nominal bonds. They can be penalised by a rise in real rates or deflation. However, at maturity, the US Treasury repays the highest amount between the original principal and the inflation-adjusted principal.
2021 Investment Themes

Our 10 Investment Themes for 2021