Germany (Deutschland), Institutional
Change
As we approach the second half of the decade, the Solutions team has been reflecting on how the 2020s are not only reshaping the global economy but increasingly starting to reframe how investors think about portfolio design.
I see three key areas for investors to focus on in 2026: the role of alpha, the role of income and the role of uncorrelated returns.
Different problems require different approaches
The global economy is being reshaped. A structural transition from a macroeconomic and market environment characterised by low interest rates to a new regime is well underway. The key driver is inflation: unlike the 2010s, when persistently low inflation allowed central banks to cut rates preemptively, today inflation remains above target in most developed markets. Even at these levels, policy is still somewhat constrained and central banks must stay vigilant.
The result has defined much of the first half of the 2020s: rapid swings in inflation, accelerated central bank responses, faster market cycles, and above all, much more volatility and uncertainty. One notable consequence is that the negative correlation between equities and bonds that investors have enjoyed for the past two decades has become less dependable as cross-asset correlations have destabilised, a useful reminder that this relationship is conditional, not permanent.
Despite this backdrop, investors have still experienced a decade of strong equity index performance. Yet one theme consistently emerges in client conversations: forward-looking return expectations are lower. Elevated valuations and margins suggest that we could see mean reversion ahead, and in this new regime, achieving the same outcomes investors have become accustomed to and creating resilient portfolios will require a more targeted approach to portfolio construction. As the decade progresses, I believe we’ll start to see a much greater focus on how portfolio construction must evolve to meet the demands of the new regime.
Three roles for a new regime
Within Solutions, when we think about meeting client objectives and building resilience in a world of lower index returns, we focus on three key areas: the role of alpha, the role of income and the role of uncorrelated return streams.
A thoughtful approach to alpha
Alpha becomes increasingly important in a world where broad market exposure alone isn’t enough to meet objectives. But this isn’t active for active’s sake. It’s about being thoughtful: understanding where active management adds most value and how to construct portfolios that can deliver consistent alpha at scale.
Leaning into a more globally diversified equity basket may be helpful here. Our team spends a lot of time focused on identifying parts of the market most conducive to active management and designing portfolios that seek to deliver alpha in a disciplined and repeatable way. When evaluating where active budget may be best spent, we look at several factors, such as the number of analysts covering each market, dispersion levels, idiosyncratic risk and how fast information is priced in. This isn’t to say that investors should abandon US mega-cap leadership, as that would introduce active risk into portfolios, but diversifying across regions and market cap into less efficient areas of opportunity may be worth considering.
Prioritising stability of income in a world of inflation volatility
In the years ahead, income will account for a larger share of total returns. But with our expectations of higher inflation volatility, it’s vital to think carefully about the stability of that income. This means investors may want to diversify their income sources, not just relying on bonds, but looking across asset classes at both traditional and alternative sources, to help build a more balanced and resilient income stream.
Broadening the sources of return
After years of double-digit returns from equities, the starting point for risk assets is naturally more fragile. That’s why uncorrelated return streams are more critical than ever. Over the last few years, we’ve seen gold play a meaningful role in portfolios and we incorporate a broad range of other diversifying strategies, including equity absolute return, hedge funds, commodities and alternative assets.
As we look towards 2026, it’s important to remember that uncertainty is not necessarily inherently negative for investors. In fact, in an age of uncertainty, deep research can help give investors an edge. However, I believe that uncertainty does demand sharper portfolio design and more deliberate diversification — blending alpha, income and uncorrelated return streams in order to meet objectives in a more challenging environment.
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional or accredited investors only.
