Though bonds have been the portfolio diversifier of choice in the last 25 years, extreme valuations create a drag on portfolio returns in normal times and are a hurdle to decorrelation and hedging in bad times, notes Morgan Stanley. Andrew Sheets and colleagues explored new diversifiers in four broad categories in their July 7 research piece titled “The New Diversifiers."
With yields at record levels, can bonds still be an effective diversifier?
Sheets and team point out that bonds had been the go-to diversifier for 60/40 portfolios for the last 25 years. In fact, bonds have ticked many of the boxes as a consistently good diversifier since 1990, maintaining low volatility, low correlation to stocks, and robust returns, they wrote. They...
