Strategic asset shifts diversify for the decade ahead

As a new world order emerges, our portfolios are adapting. Geopolitical fragmentation is driving spending in developed economies and creating opportunities in emerging markets. Our annual Strategic Asset Allocation (SAA) review – the long-term framework behind the bulk of portfolio returns – introduces adjustments to broaden sources of performance. Based on expected asset class evolutions over the next decade, these changes increase diversification and position portfolios for phases of volatility.

2025 starkly illustrated just how competition and geopolitical tensions are shifting strategic national priorities. That is driving fiscal spending towards achieving strategic autonomy in sectors such as technology, infrastructure and energy, while tariffs are raising trade barriers and reshaping supply chains. In addition, the impacts of climate change, conflict and access to resources are also reshaping the landscape for investment opportunities. This has created slightly higher ‘neutral’ interest rates – that neither drive nor limit economic growth - in most regions compared with the pre-pandemic era. Such structurally higher rate levels are being combined with elevated equity valuations after a solid performance for stocks in recent years, and optimism around the potential of artificial intelligence (AI). Higher interest rates and high valuations help determine the broad outline of investment returns over the decade ahead. 

Beyond US equities

We expect global equities to keep delivering solid returns thanks to their exposure to both corporate growth and profitability. Stocks therefore form the backbone of portfolios for investors seeking to grow their capital. Rising global investment needs support the medium-term outlook for corporate earnings. However, the above-average returns of equities over the past decade may be hard to repeat. Corporate valuations are now high by historical standards, and the returns that the asset class delivers above government bonds or the ‘equity risk premium’, are relatively low, particularly for the US market.

Given the mix of corporate investment and investor expectation, AI remains the single greatest uncertainty in equity markets

This is not a position on the debate about whether US ‘exceptionalism’ is fading. Leadership in global equities has varied since the 1980s, with the US, Japan, and Switzerland each outperforming at times when measured in US dollar terms. US outperformance has been a powerful driver of US asset dominance in portfolios over the last decade. Our decision reduces concentration risk in US stocks, as well as exposure to a soft US dollar. Index convergence and stretched valuations are, we think, very sound reasons for diversifying our global equity allocations. There are others; US policy uncertainty, tariffs, and the threat to institutional credibility are also weighing on US financial assets for foreign investors in the short run. Of course, AI may yet deliver a productivity boost to lift returns, but we would expect such benefits to roll out across many regions and sectors, not just the US and the largest tech firms that dominate its index. Given the mix of corporate investment and investor expectation, AI remains the single greatest uncertainty in equity markets.

Fixed income returns

Bonds should continue to provide portfolios with a steady source of income, particularly corporate bond yields that are relatively high, and should prove less volatile on average than equities. Tight spreads, or the difference between yields on corporate and sovereign bonds, partly reflect a low need for refinancing and strong corporate fundamentals, including firms’ manageable debt levels.

Switzerland stands out as an exception to the structurally higher interest rates that we see across developed markets compared to the past decade. The low-rate environment makes generating meaningful returns from Swiss sovereign or even corporate bonds challenging. To enhance yields and income in Swiss franc portfolios, we therefore increase our dedicated allocation to Swiss real estate. At the same time, the lack of synchronisation in global monetary policy – the Federal Reserve is still in a rate-cutting cycle while the European Central Bank and Swiss National Bank have completed theirs – favours exposure to international sovereign bonds.

We keep a standalone position in gold in portfolios and are now raising this exposure

The case for convertible bonds

Convertible bonds can play a strategic portfolio role thanks to their ability to deliver participation in equity returns with a bond-like resilience. In addition, in today’s highly concentrated benchmarks, they offer a different selection of sectors and geographies from standard equity indices. This is because convertible bonds tend to have more exposure to innovation-driven sectors of the economy and are often issued by mid-sized companies, making them less correlated to the mega-cap stocks that dominate index performance. This can allow investors to broaden their portfolio diversification without giving up exposure to economic growth. We are therefore introducing a standalone allocation to convertible bonds in our SAA and reducing our exposure to high quality fixed income.

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Within alternative investments, we keep a standalone position in gold in portfolios and are now raising this exposure. As well as offering diversification, gold can provide a hedge against geopolitical, growth and inflation risks that we believe will be superior to that offered by high quality sovereign bonds. In the decade ahead we expect gold prices to be supported by central bank demand as they continue to diversify their reserves away from US dollars. Hedge funds remain positioned to benefit from environments characterised by higher volatility and increased dispersion of returns between and among asset classes. Manager selection therefore continues to play a significant role in performance.

It makes sense for long-term investors to take a ‘total wealth’ approach

Total wealth thinking

We still believe that it makes sense for long-term investors to take a ‘total wealth’ approach to their portfolios, rather than treating each asset class or investment in isolation. Where appropriate, this includes private assets as part of the SAA. Private equity, private debt, infrastructure and real estate can each offer significant portfolio diversification and return advantages for investors prepared to sacrifice some liquidity.

As the geopolitical, policy and market landscape evolves for investors, we are positioning multi-asset portfolios to benefit. We anchor portfolios in core asset class exposures, while our updated SAA seeks to broaden sources of returns and diversification, including private assets for eligible investors.

What is the SAA and why update it?

Our SAA serves as the foundation of our multi-asset portfolios, guiding asset allocation decisions based on macroeconomic trends and projected asset class returns over the next decade. Regular SAA reviews are integral to our wealth management approach, ensuring that clients’ portfolios remain positioned for success over the long term. An exceptional two years of returns in US equity markets for example has been captured by the changes we made to our SAA in late 2023.

Our goal is to deliver one of the most resilient asset allocation frameworks available to private investors. The SAA complements the tactical moves that we implement throughout the year to benefit from shorter-term opportunities.