As market dynamics shift in response to renewed inflation concerns, elevated US valuations, and a changing geopolitical landscape, multi-asset investors must rethink their approach. Brooks Macdonald explores how combining global diversification with active management can turn volatility into opportunity and build resilience in an era where the traditional 60/40 portfolio no longer fits the bill.
This article was featured in our Multi-Asset Fund Insights 2025, looking at the latest thinking and analysis into what’s going on within this key market segment. Readers can check out the full publication here.
The Multi-Asset investing landscape is evolving. President Trump’s global trade policies have dovetailed with falling interest rates – which are still higher compared to post-Global Financial Crisis (GFC) years – to herald a new era of risk and opportunity.
The challenges of 2022 provide a sharp lesson. At that time, positive correlations between equities and bonds triggered simultaneous declines in both asset classes. As correlations return to normal levels, investors have a chance to rebuild portfolio resilience—but only by challenging conventional approaches.
Creating efficient multi-asset portfolios calls for global diversification, active strategies, and careful navigation of ever-changing policies. This article explores how investors can achieve resilience, seize diversification opportunities, and thrive in the dynamic macro environment of 2025.
The Return of the Benefits of Diversification
In 2022, the negative correlation between equities and bonds, a cornerstone of multi-asset portfolios, failed.
A spike in inflation caused central banks to raise interest rates, causing bond yields to rise and prices to fall. Meanwhile, stock prices were hit by slowing economic growth.
However, 2025 data is showing a return to normalcy. Ten-year Treasury yields held steady at around 4.5%, and bonds are once again useful as a hedging tool against volatile equities.
But times are changing. The traditional 60/40 portfolio (a strategy of allocating 60% of a portfolio to equities and 40% to bonds) is no longer a universal solution.
The volatility of 2022 showed that static allocations do less well in turbulent markets. Bigger economic risks, from geopolitical tensions to policy shifts, require constant attention. It is good that inflation is levelling out and interest rates are dropping – this all supports the multi-asset framework. But investors must stay agile and manage exposure to manage a changing market.
The risks of US-Centric Portfolios
For years, many multi-asset portfolios have relied heavily on US equities, driven by a benchmark-hugging tendency and strong post-GFC returns. The US Dollar was the world’s reserve currency and a ‘safe haven’ asset in its own right. At the same time, US Treasuries became the global asset allocator’s default risk-free asset.
While US-heavy allocations have a good track record, they now carry significant risk. As we have seen, US equity valuations are stretched, with the S&P 500’s price-to-earnings ratio at twenty-one times at the time of writing in late spring 2025, compared to a historical average of seventeen times. President Trump’s tariffs also threaten corporate earnings by disrupting supply chains and raising input costs.
Embracing Global Diversification and Active Strategies
To counter US concentration risks, investors should diversify geographically and by sector. In effect, they should reduce their exposure to fully valued US markets in favour of undervalued regions like the UK, Europe, or Japan. Keeping a close eye on geographical and sectoral correlations is key to managing risk, particularly in tech-heavy US areas. For example, investing in defensive or value sectors, such as healthcare or consumer staples, can make a portfolio more resilient.
On the other hand, selective active management in less efficient markets can capture mispricing in fragmented markets. By combining diversification with disciplined active management, investors can transform volatility into opportunity.
Modernising the 60/40 Portfolio
The 60/40 portfolio may no longer necessarily be the optimal solution, and investors must evolve their approach to meet 2025’s challenges. Right now, the US has tens of trillions of dollars of estimated debt to refinance in the next three years. This challenges the default, risk-free ‘go-to’ status of US Treasuries and will promote more geographically diversified portfolios.
Investing in alternative assets, such as structured products and hedge funds, can enhance resilience against tariff-driven inflation and market swings. Disciplined risk management is paramount. Maintaining underweights in fully valued markets like US equities should mitigate drawdowns and put portfolios in a good place to outperform expectations. However, this all depends on allocators making diverse investments.
In other words, the post-GFC “buy-the-dip” mentality, rooted in US market dominance, is increasingly questionable. Forward-looking allocation decisions, informed by macro trends and active risk monitoring, matter more.
The Path Forward
In 2025, multi-asset investing has changed. It now demands flexibility in a climate defined by policy-driven risks, elevated equity valuations, and volatility. This year, diversified portfolios may outperform those that are still tethered to static, US-centric models. The path forward lies in strategic evolution and disciplined execution.
