J.P. Morgan Asset Management (JPMAM) has identified five key sources of diversification to combat the impacts of macroeconomic shocks.
The asset manager’s 2024 Long-Term Capital Market Assumptions report has provided a diversification toolkit for investors looking to expand their portfolios.
While a 60/40 stock-bond allocation remains a sufficient starting point, creating more robust portfolios to mitigate external pressures and minimise value destruction is crucial, JPMAM says.
“Broadening out a standard 60/40 portfolio to include a collection of these exposures has proved beneficial historically but, more importantly, we believe it will be suited for constructing stronger portfolios in the world of heightened macroeconomic uncertainty that we forecast,” the report wrote.
The firm firstly highlighted risk premia strategies as a diversifying source, which are defined as harvesting excess returns associated with different risk factors or market anomalies.
Active management and tactical asset allocation is pinpointed as another way to diversify, particularly amid a turbulent economic backdrop.
“This diversification effect may be underappreciated when broad beta is working well. At times of positive stock bond correlation, when investors have almost nowhere left to hide and diversification is most valuable, active management can play a multifaceted role in portfolios.”
Thirdly, the firm identified currency as a potential consideration to expand one’s portfolio.
The report stated: “There is thus a tremendous opportunity to capitalise on an inefficient market and generate a return through actively trading currencies.”
Capturing long-term trends is a fourth way for investors to implement thematic diversification.
According to JPMAM, “supercycle” trends, defined as a sustained expansion that originally referred to a commodity market boom, include sectors such as energy efficiency, technology advancements, artificial intelligence (AI) and genetics.
“The energy transition and the technology/AI themes are just two examples of thematic alpha that investors can potentially use to diversify their portfolios.”
Finally, the firm looked towards alternatives as a diversification strategy to mitigate overall portfolio volatility. Key examples include hedge funds, alternative credit and real assets, such as global infrastructure and transport.
The report concluded: “The diversifiers in our basket have historically delivered positive returns, are not costly (like traditional portfolio hedges) and are fairly valued. Those qualities make the present moment a timely one for reshaping portfolios by expanding the diversification toolkit.”
