From the renewed impact of US tariffs and higher-for-longer interest rates to a revived case for bonds and the evolving role of alternatives, multi-asset portfolios are being tested in 2025. Nick Stanhope (pictured), Senior Portfolio Manager and Tom Mills, Principal, Manager Research at Morningstar Wealth, explore the key factors shaping asset allocation and portfolio construction today and why diversification and disciplined manager selection remain critical to long-term success.
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In 2025, investors face a complex set of challenges and opportunities as they seek to build resilient, diversified portfolios. These range from geopolitical developments and interest rate dynamics, to the evolving role of asset classes and the ongoing debate around the ‘60/40’ approach to portfolio construction.
US Tariff Policy and Strategic Allocation Discipline
An immediate source of uncertainty in 2025 has been the resurgence of US tariff policy. With the introduction of tariffs on key imports and growing trade tensions at a level that exceeded most investors’ expectations, global markets have responded with higher volatility. However, investors should be cautious about making hasty strategic allocation shifts in response.
Despite the policy noise, Morningstar Wealth doesn’t see a significant dislocation in relative asset class valuations. With the outlook for tariffs very uncertain, rather than making large asset allocation shifts, investors may be better served by waiting for clearer signals and potential dislocations that could offer more attractive opportunities.
The Importance of Diversification and Manager Selection
Meanwhile, maintaining a diversified portfolio remains as important as ever. The merit of holding both growth and defensive assets has been amply demonstrated in 2025, particularly during April, which saw sharp moves in both equity and bond markets. These episodes also highlight the importance of strong fund selection: It is our view that managers with disciplined investment processes are better equipped to have a repeatable edge over time and deliver long-term success. It is essential to assess performance over a longer horizon, but episodes of stress serve as valuable reference points for evaluating whether funds have behaved in line with expectations. Manager skill, supported by a capable investment team, also increases the likelihood of consistent delivery against objectives.
Morningstar Wealth’s approach to investing is not only to hold assets that can generate returns in rising markets, but also assets with defensive characteristics to defend during periods of increased volatility.
However, whilst the policy outlook remains so uncertain, it is important to maintain the balance between return drivers and diversifiers in your portfolio by rebalancing – taking profits on the winners whilst recycling those proceeds into the assets that have sold off the most.
Bonds regain strategic importance in a higher-rate world
Since 2022, the higher interest rate environment has restored the appeal of government bonds, offering more attractive yields and a reliable source of income. This marks a notable shift from the ultra-low interest rate era, when fixed income’s appeal was diminished. Importantly, bonds have regained their role as diversifiers. Over time, government bonds have typically acted as a counterbalance to equity risk, and we expect them to continue to serve as a vital component of strategic asset allocation.
Despite the uncertainty around inflation in an era of tariffs, holding bonds in a portfolio for their defensive attributes is much easier today since the overall levels of yield have risen. In 2020, a 1% increase in rates would have led to a 7.2% loss for investors holding US Treasuries, whilst today the same increase would lead to a 1.4% loss1. Whilst historically, bonds have had a negative correlation to equities when recession concerns escalate, as their prices rise in value as investors anticipate future rate cuts by central banks to stimulate the economy.
The role of alternatives in portfolio diversification
Despite the current attractive environment for bonds, one potential enhancement is the inclusion of alternative assets. Investors seeking broader diversification often look to alternatives, which can include both liquid strategies like absolute return funds and less-liquid options such as private equity or infrastructure. Alternatives can offer differentiated return streams and help mitigate equity and bond market risk. However, they also come with trade-offs: higher costs, potential illiquidity, greater complexity, and heavy reliance on manager skill. For these reasons, careful fund selection and holistic portfolio construction are essential when integrating alternatives into a multi-asset strategy.
Morningstar Wealth’s research suggests that you want to hold different types of strategies that are complementary to one another, providing further diversification benefits. The team has alighted on macro, equity long short and trend following within the alternatives sleeve. Although due to the recent flip flopping in US policy, the exposure to trend has been dialed down.
A broader market ahead?
While the outperformance of US equities over the past decade has boosted overall portfolio returns, when combined with increasingly narrow market leadership it has been a headwind for diversified funds to keep pace with our benchmarks, particularly those funds aiming to add value through security selection. If market leadership broadens or shifts in the future, it could potentially create more opportunities for such active managers to outperform. However, successful multi-asset funds require a combination of ingredients, and asset allocation remains the primary driver of returns over the long term, while keeping costs low also works to investors’ advantage over long periods.
About Nick Stanhope
Nick Stanhope is a senior portfolio manager for Morningstar’s Investment Management group for the Europe, Middle East and Africa region. With over 30 years’ experience in the investment industry, his investment responsibilities span across both UK and International investment ranges, whilst leading on the Active and Income managed portfolio ranges, and co-manager on the Carne Morningstar Multi Asset fund range. He sits on Morningstar’s Portfolio Review Committee and takes overall responsibility for the Active Fund Selection Committee. Nick’s experience encompasses multi-asset portfolio management, asset allocation, manager research and selection including within alternative investments.
About Tom Mills
Tom Mills is Principal, Multi-Asset Strategies for Morningstar UK Ltd, a wholly owned subsidiary of Morningstar, Inc. He leads the Manager Research multi-asset fund research and ratings in the UK and cross-border markets.
Before joining Morningstar in 2022, Mills worked for Hargreaves Lansdown as a senior member of the fund research team. Prior to that, he was based in Australia where he spent 12 years carrying out fund research at BT Financial Group, and Standard & Poor’s.
Mills holds a bachelor’s degree in Politics & International Relations from the University of Reading. He also holds the Chartered Alternative Investment Analyst designation.
