In his latest publication, Tommaso Mancuso, Head of Multi Asset at Hermes Investment Management, examines how unstable the relationship between stocks and bonds has been in the past. He assesses the risk-return profiles of a traditional 60-40 stock-bond portfolio, a risk-parity portfolio and a risk-managed stock-cash portfolio in a number of regimes.
“For most investors, correlations can serve as a valuable tool to help manage volatility and drawdown risk. And yet correlation is not always founded on stable causality. In fact, the narrative of the stock-bond relationship was discount-factor-driven in the 1960s through to the 1980s; that is, increasing yields caused both stocks and bonds to fall in price. Changes in the market regime can cause structural shifts in correlations and, in time, the prevalent investment narrative. This means that diversifying across stocks and bonds is no substitute for active risk management.”
Hermes expands EOS team in North America