"It’s important that advisers understand how multi-asset managers ensure diversification for clients."

Andreas Zingg

Head of multi-asset solutions, Vanguard Europe

  • History shows it’s difficult to predict which asset or sub-asset class will outperform the broader market each year – and trying to do so with client savings entails significant risk.
  • Diversification within asset classes lowers the impact of any large falls in a single security, while the higher volatility associated with concentrated equity exposures acts as a drag on returns.
  • High quality bonds tend to act as a buffer to equity market volatility and this negative return correlation is observable during the global equity sell-off in the first half of March. 


The recent spike in volatility across global markets is a timely reminder of the benefits of broad-market diversification in client portfolios.

Markets were already digesting the prospect of further monetary tightening by central banks, before the closure of two US banks sparked a sell-off in global banking shares. This ultimately led to the takeover of Swiss bank Credit Suisse by UBS and led to fears about further banking-sector developments.

In light of the increased market volatility, we share three key reasons why clients are often best-served by maintaining a well-diversified multi-asset portfolio of global equities and bonds.

1.  There is little persistence in asset class performance

The rationale for spreading client savings across global markets is fairly intuitive – as the old saying goes, ‘don’t put all your eggs in one basket’. The chart below, which shows the annual return of different equity and bond market sub-asset classes over the past 10 years, illustrates why broad diversification across markets is a sensible approach for long-term investors.

As the data highlights, it’s difficult to say exactly which investment within equity and bond markets will perform well from year to year. We only need to look at the results of 2022 to consider the dangers of concentrating investments in one region or sector, with UK equities the only asset class to deliver a positive return last year.

Key bond and equity index returns (%), ranked by performance

Past performance is not a reliable indicator of future results. 

Source: Vanguard calculations, data from 1 January 2013 to 31 December 2022, using data from Barclays Capital and Thompson Reuters Datastream and FactSet. Global equities as the FTSE All World Index, North American equities as the FTSE World North America Index, Emerging market equities as the FTSE All-World Emerging Index, Developed Asia equities as the FTSE All World Developed Asia Pacific Index, European equities as the FTSE All World Europe ex-UK Index, UK equities is defined as the FTSE All Share Index, UK government bonds as Bloomberg Sterling Gilt Index, UK index-linked gilts as Bloomberg UK Govt Inflation-Linked UK Index, UK investment grade corporate bonds as Bloomberg Sterling Aggregate Non-Gilts – Corporate Index, Hedged global bonds as Bloomberg Global Aggregate Index (hedged in GBP). Performance shown is cumulative and denominated in GBP. It includes the reinvestment of all dividends and any capital gains distributions.

2. Beware the volatility drag of concentrated portfolios

Diversification within asset classes also makes sense from a risk perspective. It lowers the impact that large falls in any one security or sector will have on the portfolio. While this is important across equity and bond markets, it’s particularly pertinent within stock-market exposures, which are generally more volatile than high-quality bond markets.

Nevertheless, some investors might think that concentrated equity portfolios made up of a manager’s ‘best ideas’ would be the surest path to outperformance. The idea being that if a portfolio consists solely of a manager’s highest-conviction ideas, returns are undiluted by second-best or lesser ideas.

Our research found the opposite to be true – that concentrating portfolios on individual securities reduces the odds of owning the few stocks that drive returns1. That’s partly because it’s hard to consistently make successful investment calls, and because if investors get their calls wrong, it is much harder to recoup those losses and start earning positive cumulative returns.

In other words, the high level of volatility associated with holding a handful of stocks leads to a drag on performance, compared with a portfolio composed of a larger number of holdings.

3. High quality bonds as a diversifier to equity markets

Last but certainly not least is the role of high-quality bonds within a multi-asset portfolio as a diversifier to equity market risk. Investing in equities offers the potential to drive long-term growth, but stock markets are volatile and can lead to big swings in performance.

As well as providing a stable income return, bond markets have historically offered a reliable hedge against equity-market downturns, owing to the broadly negative return correlation between the asset classes.

It would be remiss not to acknowledge the double fall of both stock and bond markets in 2022, but occasionally this can happen before the negative return correlation between equities and bonds reasserts itself2. Indeed, global bond prices rose in the first half of March as global equities sold-off3.

As the next chart shows, higher equity market allocations have historically delivered greater returns, but also come with the risk of greater losses relative to higher bond market allocations.  

Best, worst and average returns for various equity/bond allocation over 100 years

Past performance is not a reliable indicator of future results.

Source: Vanguard. Notes: Reflects the maximum and minimum calendar year returns, along with the average annualised return, from 1901-2022, for various stock and bond allocations, rebalanced annually. Equities are represented by the DMS UK Equity Total Return Index from 1901 to 1969; thereafter, equities are represented by the MSCI UK. Bond returns are represented by the DMS UK Bond Total Return Index from 1901 – 1985; the FTSE UK Government Index from Jan 1986 – Dec 2000 and the Bloomberg Sterling Aggregate thereafter. Returns are in sterling, with income reinvested, to 31 December 2022.

There may still be volatility in 2023 as markets remain sensitive, but we see little reason to expect the long-term negative return correlation between equities and bonds to turn positive.

Ensuring client portfolios are sufficiently diversified

Regardless of the economic environment, ensuring client portfolios are well-diversified across global equity and bond markets is an important component of portfolio construction. All-in-one multi-asset solutions offer advisers a simple way to invest client savings across global markets, but not all multi-asset funds are created equal, so it’s important that advisers understand how multi-asset managers ensure diversification for clients.

Vanguard’s multi-asset solutions, both index and active, are designed with broad diversification in mind. Investors in the LifeStrategy 60% Equity Fund, for example, gain exposure to more than 10 countries, 11 equity sectors and high-quality corporate bonds rated from AAA/Aaa to BBB-/Baa3 – representing more than 28,000 unique equity and fixed income holdings4.

Ultimately, moments of heightened market volatility will occur more than once over a client’s investment journey. Maintaining a broadly diversified portfolio of stocks and bonds remains an effective way to navigate clients towards their long-term investment goals.

As Vanguard’s founder, John C. Bogle, famously said, “why look for the needle in the haystack, just buy the stack!”


1 Source: Vanguard Research: “How to increase the odds of owning the few stocks that drive returns”, February 2019, C. Tidmore, F. M. Kinniry, G. Renzi-Ricci; E. Cilla. Data between 1 January 1987 to 31 December 2017. Based on quarterly Russell 3000 Index constituents’ return data from Thomson Reuters Market QA.

2 See Renzi-Ricci, G. and Baynes, L., 2021. “See Hedging equity downside risk in the low-yield environment”. Analysis of global equity and aggregate bond performance during equity bear markets and corrections between January 1988 to November 2020. Calculated in GBP. Equity returns are defined from the MSCI AC World Total Return Index and bond returns defined from the Bloomberg Barclays Global Aggregate Total Return Index, hedged to GBP.

3 Source: Vanguard calculations, based on Bloomberg data. Data between 1 March 2023 and 20 March 2023. Global equities represented by the FTSE All-World Index. Global bonds represented by the Bloomberg Global Aggregate Float Adjusted and Scaled Index. Price returns denominated in GBP.

4 Vanguard calculations. Data correct as at 28 February 2023.


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