Multi-asset allocation "failing"? Fund managers say "don't panic"

How do AI and fund managers interpret the current temporary failure of allocation strategies?

Special Correspondent for 21st Century Business Herald, Pang Huawei Recently, a joke has been circulating in the investment community: “I increase tech stocks, geopolitical conflicts arise; I allocate to oil and gas, conflicts turn into verbal sparring; I switch back to tech, war flames reignite; I move to oil and gas again, tensions cool down; I heavily invest in tech, and oil fields are directly bombed.”

No matter how I switch, I always get shot. Even more frustrating, the “king of hedging” gold has also plummeted.

When stocks fall, bonds fall, and gold also drops; domestic assets are declining, international assets are also falling; active products are dropping, passive products are also declining. Is the logic of diversified asset allocation broken?

Several fund managers have provided their answers: this is not a strategy failure. Moreover, every moment of “failure” could be a long-term investor’s allocation window.

Li Chunyu, fund manager of Rongzhi Investment FOF, pointed out that recent simultaneous declines in stocks, bonds, precious metals, and commodities are influenced by expectations of global stagflation and liquidity tightening caused by geopolitical conflicts in the Middle East. Major markets such as China, the US, and Europe have seen stock declines; US and European bond yields have risen; international gold prices have fluctuated wildly, with weekly drops exceeding 6%. In commodities, except for energy and chemicals, industrial and agricultural products have weakened. The resonance of various asset classes falling together is a tail risk for multi-asset strategies and the most unfavorable market condition.

Yang Delong, Chief Economist at Qianhai Kaiyuan Fund, said: “The recent geopolitical crisis has caused a ‘double kill’ of stocks and bonds. This situation is different from before. The Middle East conflict was supposed to boost risk aversion and push up gold. However, because the Strait of Hormuz was blocked, oil prices surged, leading to renewed US inflation expectations, delaying the Federal Reserve’s rate cuts, which caused gold to decline.”

Faced with this rare “resonance decline,” many investors are beginning to doubt: is multi-asset allocation no longer effective?

Liu Yong, fund manager of China Europe Fund’s Multi-Asset and Solutions Investment Department, analyzed that the core reason for the recent increased difficulty and larger drawdowns in multi-asset allocation is that, under macro narratives such as geopolitical conflicts, AI narratives, and weakening US dollar credit, the original differences among global assets have been partially flattened, and their trends are beginning to converge. Secondly, in the context of declining bond yields, increased volatility in equity markets has also constrained the negative correlation between stocks and bonds, increasing allocation difficulty. Additionally, traditional hedging assets like gold, due to prior large gains and speculative capital, have weakened their hedging ability. Before clear deleveraging, they may even become risk assets in the medium to long term.

“Although there are short-term phenomena of stocks and bonds declining together and increased asset correlation, this does not mean the failure of multi-asset allocation logic. It is the market environment change that puts traditional frameworks under pressure,” Liu Yong said.

Li Chunyu also emphasized that any strategy faces tail risks, and this is no exception for multi-asset strategies. This is not a logic failure. He further explained that similar situations have occurred multiple times in history, such as the Russia-Ukraine conflict in early 2022. “Looking back, every time tail risks occur and strategies appear to ‘fail,’ it may provide long-term investors with a window for rebalancing.”

Yongying Hengxin’s steady retirement target three-year holding fund manager Li Cheng shared a similar view. He believes that recent adjustments in most multi-asset portfolios are related to the decline of most global risk assets but do not mean the strategy has “failed.” “Although equities and bonds have diverged due to the US-Iran conflict, leading to differing market expectations and a risk-averse environment, many commodities such as crude oil, energy chemicals, and agricultural products have performed well. This also demonstrates the effectiveness of our global multi-asset strategy.” Li Cheng suggested that investors should observe the strategy’s effectiveness over a longer period.

A question worth asking is: why has multi-asset allocation suddenly become popular in recent years?

A seasoned investor said that multi-asset allocation has existed for a long time, but it has become popular in recent years mainly because the beta of gold and offshore assets has increased.

Liu Yong provided a macro perspective: First, as the domestic interest rate center declines, the traditional fixed-income-focused allocation faces the challenge of declining yields, prompting institutions and investors to turn to multi-asset allocation to reconstruct returns. Second, under low interest rates, retail deposits are moving elsewhere, and with the sluggish property market, household asset allocation needs diversification. Third, in the context of normalized geopolitical games and macroeconomic cycle dislocation, the volatility risk of single assets has increased.

Li Cheng analyzed from the perspectives of return and risk. From the return perspective, different major asset classes perform variably under different market environments, with standout assets nearly every year. From 2019 to 2020, A-shares performed well; in 2021, US stocks and crude oil led the gains; in 2022, soymeal and crude oil rose against the trend; from 2023 to 2024, gold and US stocks continued to strengthen; and in 2025, gold remains strong. From a risk control perspective, most major assets have low historical correlation; when one asset fluctuates, others may remain stable, effectively reducing the overall portfolio’s drawdown risk.

Gushang Fund researcher Guan Xiaomin added that in recent years, global economic and geopolitical fluctuations have intensified, increasing uncertainty. Single assets and strategies cannot navigate all market booms and busts. “Against the backdrop of macroeconomic volatility, multi-asset allocation aims to hedge risks through diversification, crossing economic cycles and market ups and downs, gaining increasing recognition among investors.”

Looking ahead, Liu Yong believes that multi-asset allocation will develop toward greater refinement, globalization, and proactivity: First, underlying assets will expand from traditional domestic stocks and bonds to include overseas stocks, bonds, commodities, REITs, and alternative assets. Second, multi-asset allocation will no longer be just a simple stacking of assets but will focus more on combining top-down macro judgment with bottom-up asset selection. Third, to cope with high volatility and changing asset correlations, asset management firms may increasingly utilize quantitative hedging, derivatives, risk parity models, and other complex tools and strategies.

Guan Xiaomin also pointed out that as asset volatility continues to increase, multi-asset allocation may continue to evolve, requiring managers to have a broad global perspective, a deep understanding of alternative assets, and the flexibility to adjust dynamically.

In the face of spreading market panic, how should one respond? Several professionals offered their answers.

Yang Delong believes: “In the future, multi-asset strategies will still be effective.”

Guan Xiaomin reminded investors to view rationally. He pointed out that the core logic of multi-asset allocation is to build a portfolio with relatively controllable volatility by investing in assets with low correlations. “The essence of multi-asset allocation is risk diversification, not risk elimination. During extreme ‘black swan’ events, various assets may decline simultaneously due to risk aversion or liquidity crises.”

His advice is: in the face of significant macro uncertainties, prioritize safety and avoid excessive risk exposure.

Rongzhi Investment fund manager Xia Fengguang’s advice is straightforward: “After entering a risk-off phase, maintaining vigilance is necessary and justified. But just because prices fall doesn’t mean you should be bearish; similarly, funds entering the market at the start of a rally shouldn’t be overly optimistic.”

He especially emphasized the logic of “quality during declines”: for investors, the quality of stocks held is key. If they hold leading stocks aligned with industrial upgrading or dividend stocks with strong free cash flow, they should let go of short-term trading thoughts and maintain confidence in long-term holding.

Liu Yong suggested that investors should actively expand diversification, beyond traditional stocks and bonds, into multi-style, regional, and thematic diversification, and use hedging tools and strategies based on the negative correlation among various assets.

A senior executive from a South China public fund company advised: “Investors should not disrupt their established multi-asset framework due to short-term fluctuations. Maintain low correlation among underlying assets, conduct dynamic rebalancing, and optimize portfolios. Reduce risk appetite appropriately, seek industries with clear growth trends, increase defensive allocations, and adjust positions to moderate levels. Consider opportunities in ‘Fixed Income Plus’ and FOF products.”

As Li Chunyu said, every “failure” moment may precisely be a window for long-term investors to ‘buy cheap.’

However, a public fund professional warned investors: recently, they should control their positions, avoid rushing into bottom-fishing, and manage expectations carefully.