In Virtus affiliate AlphaSimplex’s latest paper, Kathryn M. Kaminski, Ph.D., CAIA®, Chief Research Strategist & Portfolio Manager, and Jiashu Sun, Research Scientist, examine the recent performance of bond markets and their changing benefits as a tool to diversify equity exposure. They also explain why, in an environment where inflation is higher than it has been, the traditional 60/40 portfolio may be more incomplete than it has been historically.

  • Since 2020, two key properties of bonds have shifted significantly: their correlation to equities and their volatility.
  • Bonds may be more attractive when yields are higher, but they lose some of their diversification properties and provide more volatility. This is an example of bonds “behaving badly” -- exhibiting negative returns, minimal safety properties, and overall positive correlation.
  • Investors could consider adding dynamic and multi-asset class alternatives that have the potential to perform well during equity drawdowns to bring some negative correlation into a traditional 60/40 portfolio.
  • Alternative asset classes (like commodities) and alternative investment strategies (like trend following) have historically captured correlation benefits during periods where bonds “behaved badly”— helping to complete a traditional portfolio in a higher inflation environment.

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These comments are the opinion of AlphaSimplex Group, LLC. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities. Please consult your financial professional for investment advice.

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