At a glance
For years multi-asset strategies were considered a good way to achieve decent returns with much less risk than equities.
The sector remained popular for around 20 years after the dotcom bust, but as time went by success set the stage for weakness.
Performance within the sector was turned on its head in 2022. Years of ultra low interest rates meant bonds were no longer able to offer diversification.
Today the tables have turned. The great reset in bond yields means multi-asset is once again a viable option for investors seeking a smoother return profile – as demonstrated by performance in 2025 despite the tariff-related turmoil.
Diversification: Don’t have all your eggs in one basket
Multi-asset investing is all about diversification. Diversification – sometimes referred to as the only free lunch in finance – embeds the idea that if a portfolio holds various asset classes, each with their own return drivers, the outcome is a smoother return profile.
For many decades this was the thinking behind traditional balanced funds, such as 60:40 equity bond portfolios.
At the start of the 2000s, multi-asset funds became a way to seek even more diversification than before. Allocations were expanded to include assets such as property, investment grade and high yield credit, commodities and other alternatives. Multi-asset funds also have a willingness to change allocations more meaningfully than their traditional 60:40 cousins. But the core drivers of equity returns and bond returns remained the same.
Diversification often protects investors
Such diversification proved reliable in four of the five major crises from the start of the century (Figure 1). Investors enjoyed less downside risk in multi-asset funds than if they owned equities outright.
Figure 1: Diversification has worked four times out of five
Source: Bloomberg
In general, the strategy has been successful: it has worked four times out of five. But the recent experience of investors is dominated by the one year when the strategy did not work – the disappointment of 2022.
Below we explain why we believe a 2022-type outcome is far less likely to occur again.
But before we do so, note the final scenario labelled “Liberation Day”. Equity markets tumbled as the Trump tariffs rolled markets.
While multi-asset funds also fell during the turmoil, they tended to decline far less than equity funds. And multi-asset funds as a sector rebounded faster. This is part of the evidence for why we think a 2022 outcome is unlikely. Put simply, the balance between risk and return is now much better.
Why 2022 went wrong: success set the stage for weakness
Before 2022, the diversification of multi-asset funds proved helpful. However, the strategy embedded a weakness: with each crisis central banks doubled down on their commitment to keep interest rates ever lower.
The stage was set for diversification disappointment.
With inflation roaring back in 2022, central banks abandoned their commitment to keeping rates artificially low and embraced the logic of a more balanced approach. Bond markets reacted, pricing in decades of policy rates in the 4%-5% range. Gilt yields marched sharply higher. The resulting interest rate shock was the biggest since the early 1980s. The usual diversification benefit of a 60:40 portfolio wasn’t just absent, it went into reverse.
The hiking of interest rates in such a profound way caused a coordinated sell-off across markets. As yields rose, prices fell across the spectrum of government bond and credit markets. The equity market fell to reflect the higher discount rate. The result was that nine out of 10 major asset classes fell hard (Figure 2).
Diversification had evaporated. It was a big setback for the multi-asset sector.
While our own strategy did well against peers, even with our dynamic approach the portfolio wasn’t able to fully immunise against the headwinds in financial markets and ended the year in the red.
Figure 2: Nowhere to hide – 2022 asset returns
Source: Bloomberg, May 2024
Assets that fared the worst in this period were the very areas generally considered lowest risk: gilts, commercial property and even inflation-linked bonds. It was this distribution of returns that proved so hard to navigate.
The great reset: why the stage is set for a renaissance for multi-asset investing
The result is government bond yields are now normal and, in fact, quite attractive at the level previously seen in 2000 (Figure 3). This is the same level as when the classic multi-asset diversification strategy was born and went on to have 15-20 years of success. In our view the stage is now set for a renaissance for multi-asset investing.
Figure 3: Core government bond yields are back to early 00s levels …
Source: Bloomberg as at 31 December 2025
Diversification is back. Downside protection is once again possible.
The restatement of yields is not confined to government bonds. Many asset classes are seeing the same effect of higher running yields. In a sense investors are being paid for the additional diversification the comes from multi-asset investing (Figure 4).
Figure 4: … with knock-on impacts for other asset classes
Source: Bloomberg as at 31 December 2025
Appendix: 154 years of multi-asset investing
Multi-asset is aimed at investors who cannot afford the risk that comes with equities and want a smoother return profile. As we have seen from the past 25 years, it is far more effective when starting yield levels are higher – fortunately, this is the state we find ourselves in today. The balance between risk and return is far better.
The better resilience of multi-asset portfolios can be shown using long-run data from 1871.
Financial consultants often use the Sharpe ratio as a measure that accounts for both risk and return, calculated as return per unit of risk. The higher the Sharpe ratio the better. We note that:
- Since 1871, a holder of equities over a five-year time horizon has typically seen a Sharpe ratio of 0.84.
- Since 1871, a multi-asset holder of both equities and bonds over a five-year time horizon has typically seen a Sharpe ratio of 1.47.
This does mask huge variations of good periods and bad periods for multi-asset. As you would imagine, higher starting yield levels produce far better multi-asset outcomes, while the strategy can flounder in low starting yield environments.
Figure 5: multi-asset portfolios generally have better risk-adjusted returns than equities
Source: Bloomberg as at 31 December 2025
