Holding uncorrelated assets in a portfolio is one of the most powerful ways to reduce overall risk without necessarily lowering expected returns. When one asset performs poorly, another uncorrelated asset might hold steady or even perform well. This can help smooth out the portfolio’s ups and downs. Because uncorrelated assets do not usually move in sync, the portfolio’s overall volatility should theoretically be lower than that of the individual components.
Amadeo Alentorn on the importance of diversification
Amadeo Alentorn, Head of Systematic Equities.
Markets have been highly changeable over recent months, and this could well persist into 2026. In 2024-2025, a full market cycle, which might normally be expected to play out over the course of several years, was compressed into a relatively short period. After performing strongly during the second half of 2024, the magnificent Seven (the largest-cap US technology names, Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, and Tesla), were sold off in late December 2024, and there was a rally in value stocks. On 2 April 2025 (Liberation Day), President Trump announced unexpectedly large tariffs on imports. Equities fell in response, only to bounce back when the US administration announced a pause on tariffs. The next market rotation was during the summer of 2025, away from quality and into value, when a mania for ‘meme’ stocks gripped private traders and social media.
How should investors face such rapid rotations in markets? Firstly, a dynamic weighting toward different styles of investing, including growth, value and quality, in addition to considering short term sentiment and price signals, is important. Secondly, investors should construct portfolios to ensure they are diversified away from equity markets.
Traditionally, investors have sought diversification by including bonds alongside equities. A 60-40 portfolio is weighted 60% to shares and 40% to fixed income. However, over recent years, the correlation between equities and bonds has increased, eroding or even removing the diversification benefit. Over the long term, a 60-40 portfolio has failed investors in one out of every five years.
Traditional asset allocation has failed investors in one out of every five years
60/40 portfolio: 60% S&P 500, and 40%10-year US Treasuries. Total returns 1928-2025.
An equity market neutral approach can offer low correlation with both equities and bonds. This is because the long book and the short book are held in balance, with the intention of being immune from equity market moves, up or down. A market neutral strategy seeks to generate returns from alpha, not beta. In a down market, the short book may make a positive contribution even if the long book is negative. In an up market, the long book may make a positive contribution even if the short book is negative. When one book is positive and the other negative, the relative difference between them determines overall return. This means that returns can be uncorrelated with equity markets, providing the diversification investors need.
Mark Nash on rethinking the macro environment
Mark Nash, Investment Manager, Global Macro Solutions.
In 2025, America’s economic exceptionalism began to fade. The US has lost its ability to grow meaningfully faster than its peers, a trend likely to persist into 2026. Much of this has been self-inflicted, stemming from US policy choices. Tariffs have, in effect, imposed a large tax on US consumers and companies, squeezing profit margins and undermining demand. Meanwhile, the halt in immigration into the US has tightened the labour market, reducing supply while removing an important source of spending power. Together, these forces are weakening both the demand and supply sides of the US economy.
Recent data show that demand is taking the bigger hit. Job creation has slowed sharply, unemployment is edging higher, and inflation is receding as the dominant concern. Weak growth, rather than overheating, now defines the outlook. That gives the US Federal Reserve (Fed) scope to ease monetary policy further. With the economy needing continued support, bond yields are likely to fall, and the US dollar should weaken structurally.
Investors have been searching for an alternative store of value as confidence in US growth and policy wanes. Other currencies have yet to mount a sustained challenge to the dollar, burdened by their own fiscal and trade headwinds, and so gold has become the preferred outlet. This all adds to the signs that US exceptionalism is downshifting, giving rise to opportunities in non-dollar assets like emerging markets, and supporting the view that yields need to fall and not rise.
Most importantly, opportunities have opened up for global macro investing. A falling dollar means both directional opportunities in under-owned markets, and also lower correlations between sovereigns, allowing a much more robust portfolio to be constructed.
Artificial intelligence (AI) offers another dimension to the story. AI promises a huge productivity boost and a positive supply shock, but in the short term it risks displacing workers faster than new industries can absorb them. For AI to support growth rather than suppress it, policy must help facilitate retraining, investment and capital expenditure (capex). That requires lower rates, a weaker dollar and a more supportive environment for business confidence.
AI: unemployment and lower inflation
AI adoption versus change in unemployment by sector.
The US may yet regain its mantle of economic exceptionalism. But for now, it is in a transition phase, one marked by softer growth, easier policy, and a world that is searching for new anchors of value.
Ned Naylor-Leyland on gold and silver as uncorrelated assets
Ned Naylor-Leyland, Investment Manager, Gold & Silver.
When we talk about gold and silver as uncorrelated assets, there are a few points to consider. First, gold and silver are monetary instruments or monetary metals; they are not stocks or bonds.
The price of gold is not primarily impacted by the stock markets or fixed income markets. In the case of gold, it is the interest rate policy on the part of central banks that is important – and in particular the direction of real interest rates. The price of gold tends to move inversely to the direction of real interest rates, or the yield on a bond after adjusting for inflation.
If the US Federal Reserve, the most important central bank for financial markets, were to cut interest rates, as it is expected to do in 2026, that would be positive for gold because it would tend to bring down real rates.
Historically, gold has acted as a store of value during times of market volatility, geopolitical instability and economic uncertainty, and in this way it has behaved differently from stocks and bonds.
Gold’s current bull run has been supported by falling real rates, a weaker dollar, as well as market concern about the implications of rising US government debt levels, the interest cost on that debt, and the impact on US Treasuries, in my view.
Global central banks have boosted their holdings of gold in the last three years, citing the yellow metal’s performance during times of crisis, its portfolio diversification properties and inflation hedging among key reasons for the buying, according to the World Gold Council’s survey of central banks.1
In September, Morgan Stanley’s Chief Investment Officer, Mike Wilson, suggested a 60-20-20 portfolio strategy (60% stocks, 20% bonds, 20% gold) would be a more effective inflation hedge than the traditional 60-40 portfolio.2
The effect of adding gold to a portfolio of equities and bonds
Footnotes
1World Gold Council, 17.06.2025. Central Bank Gold Reserves Survey 2025 | World Gold Council
2Reuters, 16.09. 2025. https://www.reuters.com/markets/wealth/morgan-stanley-cio-favors-602020-portfolio-strategy-with-gold-inflation-hedge-2025-09-16/
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