He says: “The US government bond offers investors protection. Now, with the price having risen so much, the cost of that protection is higher. But government bonds are not really assets you own for a return, they are there for protection.”
Peter Fitzgerald, multi-asset investor Aviva Investors, says “government bonds categorically have a role to play” in a diversified portfolio.
In terms of building diversification into the equity allocation of a portfolio, Phil Smeaton, chief investment officer at wealth manager Sanlam, adds: “The best equity diversifier is to find a fund manager who can consistently outperform relative to the wider market.
"When you invest in equities, you always get beta, which is the return the market produces, such as one can get from a tracker fund. Alpha is the additional return produced by a fund manager, and as there are relatively few active managers out there who can produce returns greater than the market on a consistent basis, alpha is hard to find.
"I think long/short funds {funds where the manager can both short sell stocks and also invest in shares to go up in value} are a good way to get alpha and also to get diversification, because the short selling part of the portfolio can go up when wider markets are falling.”
Craig Brown, investment specialist on the multi-asset team at Rathbones, says his approach is to invest directly in equities, rather than buy equity funds, as this increases the precision to invest in the parts of the market that the team likes. It also means, he says, the team are accountable to investors for each stock bought.
He says the team uses “volatility to our advantage”, meaning buying more of the shares that have fallen from favour, and building a portfolio that is not exposed to only one risk.
They add broader portfolio diversification by dividing all asset classes into three groups: assets held for liquidity reasons, assets held that have the same risk profile as equities, and assets which are deemed diversifiers.
Mr Brown says: “We find that by dividing assets by characteristics, rather than asset class, we are better able to control and manage risk.
"By focusing on how assets behave and correlate with equities during market stress, it helps ensure that we do not fall into the trap of some more traditional asset allocation frameworks where fixed income, for example, is all treated similarly from a risk perspective.”
Looking ahead, those constructing portfolios face other macroeconomic decisions that will define their allocations, according to Clark Fenton, portfolio manager at RWC Partners.
