Since Covid, correlation of returns between shares and bonds has increased. And with both mostly moving in the same direction since the beginning of the Iran conflict, this has been particularly noticeable.
This increased correlation and market volatility has led some market watchers to claim that the 60/40 balanced portfolio is dead.
But we think it’s more layered than that – bonds can add diversification to a portfolio but are especially compelling alongside alternative investments.
This article isn’t personal advice. Remember, investments rise and fall in value, so you could get back less than you invest. Investing for 5+ years increases your chances of positive returns compared to cash savings. Yields are variable. Past performance isn’t a guide to the future. If you’re not sure if an investment’s right for you, ask for financial advice.
Correlation of shares and bonds
Below are two tables, the first showing the correlation between the IA Global sector (a proxy for global stock markets) and the IA £ Bond sectors for the 5 years up to the end of 2019, illustrating correlations pre-Covid. The second shows the same correlations for the five years to end March 2026, illustrating correlations since Covid.
The correlation of returns between the IA Global and IA £ Strategic Bond sectors has increased from 0.54 to 0.69. Correlation with the IA £ Corporate Bond sector has increased more, from 0.34 to 0.65. These are significant increases.
What it means for investors is that more recently, when stock markets go up, bond prices have been more likely to go up too, and vice versa.
It’s this change that has caused many investors to question the diversification benefits of bonds within a portfolio. If bond prices are more likely to move in the same direction as shares, then they’re less likely to diversify returns.
Does that mean bonds haven’t offered any diversification benefits?
While the differences in returns have reduced, there are still important differences. Stock markets are typically more volatile, but provide higher returns, compared to bonds.
This particularly matters when there’s a stock market sell off.
The below shows performance of the IA £ strategic bond sector and the IA global sector during the Liberation Day market moves in early April 2025 and the Iran conflict in March 2026.
In both cases, shares and bonds fell in value, but also, the IA £ strategic bond sector fell much less than the IA global sector.
The graph covering March 2026 shows clearly that on days where shares fell, so did bond prices. And when shares bounced, so did bond prices. But the size of the falls and rises is very different.
And it’s the difference that’s important because it’s what’s telling us that bonds do still offer diversification benefits within an investment portfolio.
What about the future
Past performance doesn’t guarantee future returns. Everything we’ve considered so far is backward looking. And there’s a consistent theme – inflation. A lot of the stock market risks in recent years have been linked to inflation, with the threat of increasing it again and the resultant fear of interest rate increases and a slowing economy.
We haven’t experienced fear of inflation in this way for multiple generations. Prior to 2022, investors had seen inflation peak at 5% twice since 1992, in 2008 and 2011. Otherwise, inflation had been low and relatively consistent.
If inflation falls back into line with target – 2% here in the UK – and is consistent, and/or future stock market shocks are not deemed to be inflationary, shares and bonds could perform more differently again.
If there is a genuine threat of recession, that would be bad for share prices. If that threat isn’t because of inflation, central banks may look to cut interest rates to try and boost the economy. Falling rates are typically good for bond prices.
Following large losses for bonds in 2022, higher bond yields (and therefore lower prices) offer greater potential for prices to go up again, too, as the value of bonds rises as yields fall.
What else can investors buy for diversification?
Gold
Gold has historically been seen as an obvious option. It’s relatively easy to buy and sell and it’s notoriously hard to predict future price movements (meaning it’s potentially a good diversifier).
Gold’s priced in US Dollars and has historically been used as a ‘safe haven’ asset by investors during periods of market stress. These two factors increase its diversification potential.
But more recently it’s behaved like a momentum stock. Below is the March 2026 performance graph again but including the gold price.
Big increases in value in recent years have shifted the narrative on gold. While this raises questions about potential diversification over the short-term, it’s likely that over the long-term it will return to behaving differently to shares, adding diversification to portfolios – particularly those designed for capital preservation. However, as an alternative investment, we think it should only make up a small part of a diversified portfolio.
We think the long-term tailwinds for the gold price are positive, as global central banks diversify wealth away from US dollars towards gold. But investors should not expect performance of the past two years in a normalised environment.
Private assets
Private assets are potentially another option. But they do carry more risk. They should only be a small proportion of portfolios, and only for investors that understand and are comfortable with illiquidity and more infrequent dealing.
Hedge funds
Some professional investors use hedge funds or derivative based ‘black box’ type investment strategies to add diversification. But it’s hard to be sure what diversification benefits there might be since they’re so difficult to understand. They’re best left to the professional investors blending these strategies alongside more core asset allocation building blocks.
Property
Historically, property has been popular with UK retail investors. But physical property is very illiquid, and this mismatch between the underlying investment and a daily dealing fund structure has caused many funds to close in recent years. The UK also has a bias for home ownership, meaning many investors are already over invested in property when you consider a home as part of their wider financial assets.
Property can be accessed via shares or Real Estate Investment Trusts (REITs). These reduce the illiquidity concerns, but when stock markets feel the stress, most shares fall. And shares in property companies and REITs are no exception.
Cash
Cash is worth considering. And should form at least a small part of most portfolios because of the flexibility it provides. But as it can’t fall in value, it usually provides the lowest long term returns too.
Do bonds still offer diversification?
Yes. The data suggests that they might offer less diversification than in the past, but over the long term – which investing should be – bonds do still offer diversification. This is particularly true during protracted market falls.
Annual percentage growth
31/03/2021 To 31/03/2022 | 31/03/2022 To 31/03/2023 | 31/03/2023 To 31/03/2024 | 31/03/2024 To 31/03/2025 | 31/03/2025 To 31/03/2026 | |
|---|---|---|---|---|---|
IA Global | 8.68% | -2.78% | 16.35% | -0.28% | 13.30% |
IA £ Corporate Bond | -4.38% | -9.44% | 7.28% | 3.26% | 4.38% |
IA £ Strategic Bond | -2.33% | -6.25% | 7.47% | 5.11% | 4.81% |
IA £ High Yield Bond | -0.90% | -4.39% | 10.60% | 7.80% | 5.36% |
LBMA Gold Price PM | 20.35% | 8.55% | 9.48% | 37.68% | 44.80% |
How can investors act?
With all that in mind, for investors looking to diversify their portfolios, here are three multi-asset fund ideas to consider.
Investing in these funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest and make sure any new investment forms part of a long-term diversified portfolio.
Remember, all investments can fall as well as rise in value, so you could get back less than you invest. For more details on each fund, its charges, and specific risks, see the links to their factsheets and key investor information.
Schroder Managed Balanced
The Schroder Managed Balanced fund is the most adventurous of the three options here as it tends to have the most invested in shares. It mainly invests in funds run by other managers at Schroders and provides investments in a broad range of assets including global shares and bonds.
The use of other funds at Schroders means that investors benefit from the experience and skill of many managers from the business. It also means the fund is well diversified.
We think it could form the core of a broader portfolio aiming to deliver long-term growth with fewer ups and downs compared to portfolios only investing in shares.
Please note that the managers' freedom to invest in high yield bonds, emerging markets and derivatives adds risk.
Baillie Gifford Monthly Income
The Baillie Gifford Monthly Income fund is mid-range for risk out of these three selections. It invests across three broad investment areas – shares, real assets (like property) and bonds. It aims to increase the income paid by more than the increase in the consumer prices index (CPI – a measure of inflation) over the long term.
While income is the focus, for investors not looking for income it’s possible to invest in accumulation units of the fund.
The fund invests evenly between its three investment areas, but the real assets section is largely made up of companies listed on the stock market. So, usually more than half of the fund is invested in shares.
We think the fund could be used to provide diversification to an investment portfolio focused on shares or growth, as well as being a useful addition to a portfolio focused on providing an income.
The fund invests in emerging markets, high yield bonds and uses derivatives, all of which add risk. The fund takes charges from capital, which increases the income paid but reduces the potential for capital growth.
Troy Trojan
The Troy Trojan fund is the most defensive of the three selections. It aims to grow investors' money steadily over time, while limiting losses when markets fall, rather than trying to shoot the lights out and always perform strongly. The managers’ focus is on downside protection – if investments fall less during periods of market stress, they don’t have to rise as much when markets rally strongly.
To do this, the fund is constructed around four 'pillars'.
The first contains large, established companies the managers think can grow over the long run and endure tough economic conditions. The rest of the fund is made up of investments that could bring some stability during more difficult markets. The second pillar is invested in bonds, the third in gold and the final pillar is cash and short-dated government bonds.
The fund tries to experience less ups and downs than the broader global stock market or a portfolio that's mainly invested in shares. As a result, it could form the foundation of a broad investment portfolio, bring some stability to a more adventurous portfolio, or provide some long-term growth potential to a more conservative portfolio.
The managers can invest in smaller companies which adds risk if used. While the fund contains a diverse range of investments, it’s concentrated. This approach means each investment can contribute significantly to overall returns, but it can increase risk.