Portfolio Risk and Performance

When Stock-Bond Diversification Fails

Managing inflation risk in investor portfolios

Topics - Portfolio Risk and Performance Macroeconomics Global Macro Trend Following

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When Stock-Bond Diversification Fails

Unprecedented monetary stimulus, coupled with extraordinary fiscal stimulus and supply chain disruptions stemming from the COVID-19 pandemic, has led to concerns about the potential for upside shocks to inflation for one of the first times in over a quarter-century. This uncertainty around the future path of inflation should prompt investors to question how different inflationary outcomes can impact their portfolio. 

We evaluate the sensitivity of traditional markets to inflation, showing potential underperformance in environments of rising or surprisingly high inflation. We then assess other asset classes often considered more resilient to inflation, including real estate, commodities, and inflation-linked bonds. We illustrate that allocations to some (but not all) of these asset classes can provide valuable diversification in inflationary episodes and thus reduce portfolio sensitivity to inflation. Lastly, we identify two strategies offering potential outperformance during both upside and downside inflation surprises – price trend following and macro momentum.

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and AQR Capital Management, LLC (“AQR”), to be reliable, but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is not to be reproduced or redistributed without the written consent of AQR. The information set forth herein has been provided to you as secondary information and should not be the primary source for any investment or allocation decision.

Past performance is not a guarantee of future performance.

This presentation is not research and should not be treated as research. This presentation does not represent valuation judgments with respect to any financial instrument, issuer, security, or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof, and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein. It should not be assumed that the author or AQR will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein in managing client accounts. 

The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy, or completeness of such information. Nothing contained herein constitutes investment, legal, tax, or other advice, nor is it to be relied on in making an investment or other decision.

There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment, which may differ materially, and should not be relied upon as such. Target allocations contained herein are subject to change. There is no assurance that the target allocations will be achieved, and actual allocations may be significantly different from those shown here. This presentation should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. The information in this presentation might contain projections or other forward-looking statements regarding future events, targets, forecasts, or expectations regarding the strategies described herein and is only current as of the date indicated. There is no assurance that such events or targets will be achieved and might be significantly different from that shown here. The information in this presentation, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Performance of all cited indices is calculated on a total return basis with dividends reinvested. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Please note that changes in the rate of exchange of a currency might affect the value, price, or income of an investment adversely. Neither AQR nor the author assumes any duty to, nor undertakes to update forward-looking statements. No representation or warranty, express or implied, is made or given by or on behalf of AQR, the author, or any other person as to the accuracy and completeness or fairness of the information contained in this presentation, and no responsibility or liability is accepted for any such information. By accepting this presentation in its entirety, the recipient acknowledges its understanding and acceptance of the foregoing statement. Diversification does not eliminate the risk of experiencing investment losses. 

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should not be construed as an offering of advisory services or as an invitation, inducement or offer to sell or solicitation of an offer to buy any securities, related financial instruments or financial products in any jurisdiction. Investments described herein will involve significant risk factors which will be set out in the offering documents for such investments and are not described in this presentation. The information in this presentation is general only and you should refer to the final private information memorandum for complete information. To the extent of any conflict between this presentation and the private information memorandum, the private information memorandum shall prevail. The contents of this presentation have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution and if you are in any doubt about any of the contents of this presentation, you should obtain independent professional advice.

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