Diversification in a rising interest rate environment

25/04/2018

A changing investment climate, in which rising short-term US interest rates may be altering correlations between traditional asset classes, requires new diversification strategies to respond effectively.

For much of the period since the financial crisis, developed market government bonds played a diversifying role in periods of short-term weakness in equity markets.

Today, this dynamic could be changing. In February 2018, rising US interest rates meant that Treasuries were a contributor to volatility rather than a mitigant.

With the era of ultra-low interest rates appearing to be at an end, there is a need for institutional investors to consider how changing correlations within, as well as across, asset classes, may affect investment performance and how to approach this.

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The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.