11 Jan 2024 3 min read

The comeback kid

By Emiel van den Heiligenberg

It has been a tough couple of years for diversified portfolios. But we think 2024 could be the year of a multi-asset revival.


The following is an extract from our latest CIO outlook.

History is littered with stories of individuals who were written off as finished before rising to previously unimagined levels of greatness, from Eleanor of Aquitaine to Winston Churchill. In recent years, markets have been so challenging for multi-asset strategies that some investors are tempted to judge the entire approach to be similarly finished.

The chart below shows the Sharpe ratio (five-year excess returns divided by risk) of a diversified portfolio minus that of a global equity portfolio. The difference between the two has been negative since 2020, right after the COVID-19 crisis – meaning equities, concentrated in the US, did better than a well-diversified, multi-asset portfolio.


Why have concentrated equity portfolios outperformed more diversified multi-asset portfolios recently? There are two main reasons:[1]

  • Big stocks have been very beautiful: Lots of the performance of equities has been in the mega cap stocks in the US. Diversification in the asset class has not paid off
  • The cycle keeps going: Equities did very well as society left lockdowns behind. Meanwhile, bonds and other ‘defensive’ assets did not. Though this isn’t abnormal late in the cycle, the extent of the performance differential is. The exceptionalism lies in bond returns as yields rose massively from very low levels, and the usual late-cycle risks did not materialise (we will never quite know how close we came with the US regional banks crisis)

Will this outperformance of equities over diversified strategies continue in 2024? We don’t think so.

First, as Tim highlights in his economic outlook, cyclical pains are being delayed, not postponed indefinitely. On the contrary, we believe a recession in 2024 is likely. Secondly, real yields are now back above zero, providing a valuation anchor on how far nominal yields can rise, especially when central banks are mostly done raising rates and inflation is on a downward trajectory.

We expect lower yields in 2024, so look for bonds to outperform cash. But even if we see a sideways move, healthy bonds yields should provide a positive return.

There is an alternative

The yields available on other asset classes have started to become interesting as well. We think the absolute yields on credit – including alternative credit – are becoming appealing from a starting yield perspective as they provide a nice cushion against further yield increases or spread widening.

As Sonja notes, we live in a challenging, multipolar world that is characterised by the rising risk of conflict. Tensions between China and the West continue to intensify, and the polarisation of politics continues, with the possible return of an ‘America first’ Trump presidency.

This is, in our view, not an environment in which to bet on the concentration of risk. One might be lucky and avoid a crisis but if not, performance could be terrible. Instead, we believe it’s a matter of spreading risk over multiple regions and multiple return drivers. Over a longer horizon, we believe diversification should outperform more concentrated portfolios on a risk-adjusted basis. The historical average of the difference in Sharpe ratios is in favour of diversification, according to our calculations.

If we are right on the recession call, that adjustment of returns might be abrupt and quite meaningful, providing a remarkable return to the spotlight for diversified strategies.

The above is an extract from our latest CIO outlook.


[1] It should be noted that diversification is no guarantee against a loss in a declining market.

Emiel van den Heiligenberg

Head of Asset Allocation

Emiel is responsible for the overall strategic direction of the team’s investment and business strategy. He claims to have been a promising lightweight rower at university until French fries got the better of him. Reflecting his love for rowing in a team, he firmly believes that excellence can only be achieved by a great team made up of motivated individuals that are also eager to work together. To this end he is the self-proclaimed inventor of the verb 'teaming' to acknowledge that shaping a top team and culture of excellence is an ongoing process. Outside of work-family obligations, Emiel’s spare time is filled by a passion for shark diving and skiing. Prior to dedicating his career to portfolio management in 1996, Emiel worked as a policy adviser in the Dutch Ministry of Finance and he graduated from Tilburg University in the Netherlands ages ago. When not glued to his Bloomberg screens, this Dutch man is hooked on computer games, peanut butter and his favourite dark beer made by Belgian monks.

Emiel van den Heiligenberg