For years, the standard 60/40 portfolio relied on a simple inverse relationship between equities and bonds. However, as volatility spikes, that safety net is fraying, and panelists at Exchange discussed responses to this challenge.
At the recent Exchange conference, panelists Kaisa Stucke, asset allocation committee chair at Confluence Investment Management; Keith Buchanan, senior portfolio manager at GLOBALT Investments; John Davi, founder, CEO, CIO of Astoria Portfolio Advisors; and moderator Lois Gregson discussed how they are redrawing the map of asset allocation to combat rising correlations and sticky inflation.
The Diversification Dilemma
The panel opened with a stark reminder: diversification is no longer just about adding more asset classes; it is about diversifying within them. As Stucke highlighted, “correlations are not static… usually when there’s stress, when you’re hoping those correlations hold, that’s when they converge to one.” To counter this, Stucke’s team is leaning into equity risk but balancing it with alternatives like gold and dividend overlays.
Rethinking Fixed Income and International Plays
The shift from a zero-interest-rate policy to the current environment has fundamentally changed the fixed income thesis. Buchanan noted that his firm is currently “underweight fixed income” from a global standpoint, instead favoring “gold and silver” to express concerns over fiscal spending and global debt.
On the equity side, the “home bias” of U.S. investors is being tested. Buchanan observed that “diversification has been an albatross around the neck of every advisor” for years, but he believes the valuation gap is finally closing. He emphasized that his core three- to five-year alpha plays are becoming more opportunistic in international markets.
The Rise of Liquid Alts
When bonds fail to provide a hedge, liquid alternatives step in. Davi explained his process of using “liquid alts to cut the left tail risk off.” Specifically, he pointed to the use of funds like AGF U.S. Market Neutral Anti-Beta Fund (BTAL), which maintains a negative correlation to the S&P 500, acting as “insurance” during high-volatility periods.
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