Does asset class diversification still matter?
The assumptions underpinning the classic 60:40 portfolio are breaking down as asset classes become more correlated and markets more concentrated.
Hugh is co-chief investment officer at Talaria Capital.
Ever since Harry Markowitz introduced Modern Portfolio Theory in 1952, diversification has been regarded as a cornerstone of portfolio construction.
Markowitz argued that investments should not be viewed in isolation but in terms of how they impact an overall portfolio’s return. An investor could therefore construct a portfolio of assets that would provide better return for a given level of risk than just investing in one single asset type.
The 60:40 portfolio — 60% in growth assets such as equities and 40% in defensive assets such as bonds — was born of this thesis.
But more than 70 years have passed since Markowitz published his paper on portfolio selection, and both the world and markets have changed considerably.
