Insights
Multi-assetMulti-Asset: Diversification beyond asset class labels
Looking beyond labels can help investors build portfolios that are less dependent on any one market or economic outcome.
Author
Craig Hoyda
Investment Manager
Part of
The Investment OutlookDuration: 4 Mins
Date: Aug 17, 2026
Many investors think they are diversified.
A typical portfolio may contain a range of equities and bonds. On paper, that appears sensible. Different assets should behave differently, helping to smooth returns through changing market conditions.
That said, recent history suggests otherwise.
When inflation surged in 2022 and central banks aggressively raised interest rates, shares and bonds fell together. Assets that were expected to deliver diversification responded to the same underlying forces in the same way. Portfolios that looked balanced suddenly appeared far less resilient.
Inflation concerns have resurfaced amid unresolved tensions in the Strait of Hormuz.
True diversification depends less on how many assets a portfolio holds than on understanding what drives their returns.
Other strategies may also seek to benefit from market trends, pricing differences between related investments, or an investment manager’s skill.
Looking at these underlying drivers can reveal concentrations that conventional analysis through an asset-class lens may miss.
For example, global equities, high-yield bonds and listed real estate are distinct asset classes. But each may depend partly on companies remaining profitable and investors retaining confidence.
A strategy driven by government bond yields, currencies or differences in the prices of related securities may respond to other conditions. This does not necessarily make it safer, but it could provide the portfolio with an additional path to returns.
The aim is to combine investments that can deliver returns for different reasons.
That said, recent history suggests otherwise.
When inflation surged in 2022 and central banks aggressively raised interest rates, shares and bonds fell together. Assets that were expected to deliver diversification responded to the same underlying forces in the same way. Portfolios that looked balanced suddenly appeared far less resilient.
Inflation concerns have resurfaced amid unresolved tensions in the Strait of Hormuz.
True diversification depends less on how many assets a portfolio holds than on understanding what drives their returns.
Different investments, similar risks
Investment returns have many potential sources. These include income, economic growth, interest-rate volatility, inflation, currency movements and changes in valuation.Other strategies may also seek to benefit from market trends, pricing differences between related investments, or an investment manager’s skill.
Looking at these underlying drivers can reveal concentrations that conventional analysis through an asset-class lens may miss.
For example, global equities, high-yield bonds and listed real estate are distinct asset classes. But each may depend partly on companies remaining profitable and investors retaining confidence.
A strategy driven by government bond yields, currencies or differences in the prices of related securities may respond to other conditions. This does not necessarily make it safer, but it could provide the portfolio with an additional path to returns.
The aim is to combine investments that can deliver returns for different reasons.
Beyond the labels
One way to assess a portfolio is to group its investments according to four broad influences:- Corporate risk: exposure to the prospects of companies through equities, corporate bonds and similar investments.
- Interest rates: sensitivity to government bond yields, inflation expectations and monetary policy.
- Currencies: exposure to movements between the US dollar and other currencies.
- Commodities: exposure to resources such as energy, industrial materials and gold.
Different investments within one category may respond similarly to a major economic development. Equities and corporate bonds, for example, can both struggle if investors become concerned about companies’ profits or ability to repay debt.
However, these four groups are less closely correlated. Higher inflation may affect bonds, currencies and commodities differently from weaker economic growth.
That’s why combining different return drivers can reduce dependence on any single outcome.
Valuations and structural economic changes can matter greatly over a decade but have little influence over a few weeks. In the short term, market positioning, momentum or an unexpected policy announcement can overwhelm longer-term fundamentals.
It can help to think about markets in terms of climate, seasons and weather:
However, these four groups are less closely correlated. Higher inflation may affect bonds, currencies and commodities differently from weaker economic growth.
That’s why combining different return drivers can reduce dependence on any single outcome.
Diversifying across time
Return drivers also operate over different periods.Valuations and structural economic changes can matter greatly over a decade but have little influence over a few weeks. In the short term, market positioning, momentum or an unexpected policy announcement can overwhelm longer-term fundamentals.
It can help to think about markets in terms of climate, seasons and weather:
- Climate: long-term structural forces such as demographics, productivity, debt and valuation
- Seasons: medium-term developments including the business cycle, inflation and monetary policy
- Weather: short-term shocks, investor sentiment and changes in market trends.
A warm day in winter does not mean the climate has changed. Similarly, a market rally does not necessarily tell investors anything about returns over the next decade.
Some investment strategies are patient, seeking to benefit when unusually high or low valuations eventually return towards more normal levels. Others respond more quickly to economic data, market trends or policy expectations.
Neither is inherently better. Both can experience difficult periods. Combining approaches that operate over different horizons can, however, make a portfolio less dependent on a single view of how and when markets will adjust.
For example, infrastructure may generate income from assets providing essential services, sometimes through long-term or inflation-linked contracts.
Real estate returns may depend on rental income, local supply and demand, financing costs and property values.
Meanwhile, specialist credit may provide access to opportunities not represented in traditional bond indices.
Alternative strategies can also help. Relative-value approaches seek to benefit from pricing differences between related investments. Trend-following strategies seek to participate in sustained moves across equities, bonds, currencies or commodities.
But the ‘alternative’ label is not enough.
Listed assets remain exposed to market sentiment. Less liquid investments may be difficult to sell. Some hedge fund strategies can contain hidden equity, credit or liquidity risks. Trend-following approaches may struggle when markets repeatedly change direction.
Investors must examine what actually generates the return and how the strategy could behave under stress.
Some investment strategies are patient, seeking to benefit when unusually high or low valuations eventually return towards more normal levels. Others respond more quickly to economic data, market trends or policy expectations.
Neither is inherently better. Both can experience difficult periods. Combining approaches that operate over different horizons can, however, make a portfolio less dependent on a single view of how and when markets will adjust.
Broadening the toolkit
Alternative investments and strategies can introduce further sources of return.For example, infrastructure may generate income from assets providing essential services, sometimes through long-term or inflation-linked contracts.
Real estate returns may depend on rental income, local supply and demand, financing costs and property values.
Meanwhile, specialist credit may provide access to opportunities not represented in traditional bond indices.
Alternative strategies can also help. Relative-value approaches seek to benefit from pricing differences between related investments. Trend-following strategies seek to participate in sustained moves across equities, bonds, currencies or commodities.
But the ‘alternative’ label is not enough.
Listed assets remain exposed to market sentiment. Less liquid investments may be difficult to sell. Some hedge fund strategies can contain hidden equity, credit or liquidity risks. Trend-following approaches may struggle when markets repeatedly change direction.
Investors must examine what actually generates the return and how the strategy could behave under stress.
Five questions for investors
Before adding a diversifying investment or strategy, investors should ask:
- What is expected to generate the return?
- Over what period should it work?
- What might make it behave like the rest of the portfolio?
- How could it respond if market conditions reverse?
- Does it add a genuinely different source of return?
Final thoughts
Diversification remains fundamental to portfolio construction, but asset-class labels alone may provide false reassurance.A new holding adds value as a diversifier only if it contributes something meaningfully different. Investors should therefore ask not only what a portfolio owns, but why each component should deliver a return, when that return might emerge and what could cause it to move with everything else.
Diversification cannot eliminate risk or prevent losses. But understanding the different routes through which returns may arise can help investors build portfolios that are less reliant on any one version of the future.
