Breakdown of traditional portfolio relationships hinders diversification - Professional Wealth Management

Diversification is becoming harder just as investors need it more, as prices of stocks and bonds can fall together and investments across regions, sectors and asset classes are increasingly exposed to the same underlying drivers, according to PWM. Private bank chief investment officers are responding by broadening portfolios beyond the traditional stock-bond mix. Over three-quarters of respondents to PWM's 2026 Global Asset Tracker say elevated volatility and return dispersion are raising the role of alternatives, and 59 per cent agree private markets are becoming core strategic allocations. Agreement is weaker on whether the old model is broken: 57 per cent say the 60/40 framework is no longer sufficient, while 30 per cent are neutral.

HSBC Private Bank's Willem Sels argues that high weights of technology and the US in global equities make it very difficult to diversify sufficiently within equities, so investors need to use assets for different purposes rather than seeking a single bond replacement. Government bonds remain important for income, infrastructure can provide inflation-protected income, and gold and hedge funds broaden the mix. Lombard Odier's Luca Bindelli and Nannette Hechler-Fayd'herbe note that bonds protect well in a growth slump but can be hurt by inflation or fiscal shocks, and that correlations are turning positive across assets. Hechler-Fayd'herbe identifies hedge funds, private equity, money-market investments, floating-rate bonds and emerging-market assets as better-placed diversifiers currently, with gold and inflation-linked bonds strongest in stagflation.

Gold stands out in the survey, and Citi's Kate Moore says the bank has used it as a portfolio construction tool given its liquidity and lower correlation. RBC's David Storm warns of a "correlation/diversification failure risk," noting that AI and energy exposures are embedded across equities, investment-grade credit and private credit, and calls for a more dynamic allocation approach.

Geographic diversification can also conceal shared risk. Wells Fargo Investment Institute's Michelle Wan notes that Korea and Taiwan, whose equity markets are concentrated in major chip suppliers, now make up about half of the MSCI Emerging Markets index. Julius Baer's Yves Bonzon sees China as a relatively decorrelated market at modest weights, and says allocation decisions now require granularity beyond regions and sectors. The survey finds 65 per cent of investment bosses expect client allocations to EM equities to rise over the next 12 months, and 52 per cent rate infrastructure attractive on a risk-adjusted basis. JPMorgan Private Bank's Grace Peters highlights infrastructure's income and inflation protection, while Moore cautions that many alternatives simply offer familiar exposures through different vehicles.