In most asset allocations, the equity portion represents the majority of the total risk. Fixed Income is used to lower volatility and to cushion portfolio drawdown.
Today, many investors are concerned about how public policies (particularly monetary policy) have distorted returns for both equities and fixed income. This has raised concerns about potentially high valuations for equities while at the same time fueling worries about the potential for rising rates and widening credit spreads in fixed income. In short, investors are worried about “market risk.” With heightened concerns surrounding market risk, it seems natural for many investors to seek additional ways to diversify portfolios.
In this quest for diversification, investors may ask: what does not necessarily correlate with market risk or market beta? The answer: active investment decisions or investment strategy.
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