At the start of the New Year, everyone is striving for balance. That might be balancing the gluttony of Christmas with a virtuous new regime, or promising that 2026 will be the year that you leave the
office before 7pm. It is worth resolving to take a similarly balanced approach to your portfolio in the year ahead.
Please remember that the value of investments will fluctuate and returns may be less than the amount
originally invested. Tax treatment depends on your individual circumstances and tax rules can
change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert
adviser.
What might that balanced portfolio look like?
The basic principle underpinning any portfolio should be that the various elements don’t all move in the same way at the same time. That way, if one part of your portfolio hits a rough patch, it won’t take everything down with it.
That isn’t always easy. The relationships between asset classes aren’t static and there will be moments when global financial markets move in unison. In 2022, for example, almost all financial markets took exception to a sharp rise in interest rates. Stock markets sold off, but so did corporate and government bonds, which would normally provide some protection.
At the same time, a balanced portfolio may also look different in shifting market conditions. Different asset classes may be over or under-valued at various points, which will change their risk. This is why a balanced portfolio needs to be more nuanced than simply a handful of bonds and a handful of equities lumped together.
Balance is becoming more important as stock market concentration grows. The major global stock
market indices are highly concentrated in the US. The MSCI World index has a 72% weighting to the US, with a significant allocation to the technology sector. Nvidia alone is 5.6% of the index*. Even in bond indices, there is a significant concentration in the US. For example, the FTSE World
Government bond index has a 42% weight in the US*. Passive investors in these indices may find that their portfolio is anything but balanced.
With that in mind, what might a balanced portfolio look like today?
Equities
Within equities, a balanced portfolio will combine different regions, sectors, and investment styles. At the moment, when there is lots of concern about the impact of artificial intelligence, it is important to balance a growth fund (which is likely to have high weightings in technology) with a more value or quality approach.
Debbie King, portfolio manager at Aegon, says: “If the last year has taught us anything it is the
uncertainty over US policy and its implementation, not just in trade and security though these are key to the weakening of trust in the US as a reliable partner. There are implications in this for dollar assets which investors will do well to consider in the year ahead.” She is balancing US weightings with allocations to inexpensive sectors such as financials and utilities, while also diversifying into other regions, such as Asia, to mitigate US market concentration risk.
In an individual portfolio, this might mean balancing high growth funds such as Baillie Gifford American or T. Rowe Price Global Focused Growth Equity, which have a high weighting in the US
technology sector, with those which are weighted elsewhere. This may be an income-focused fund, such as Evenlode Global Income, or a fund taking a value approach such as Ranmore Global Equity.
The Ranmore fund aims to offer real diversity from traditional global funds. Manager Sean Peche
says: “Our portfolio is broadly diversified with no large individual stock positions. We can never be
certain of the future in an ever-changing world, and while large positions are great when the future unfolds as expected, they can significantly hurt portfolio performance when it doesn’t.
“To illustrate how unpredictable the world is, consider that only a month ago Open AI powered by
Nvidia chips was considered the winning AI combination, but now Google’s Gemini 3.0, powered by internally-developed chips, looks to be a viable challenger – hence the -13% fall in Nvidia.”
Fixed income
Fixed income holdings would normally be the first port of call to balance equity market risk. In
general, bond markets do well at times of deflation and falling interest rates, while stock markets do well when economic growth is stronger. However, equity and bond correlation can increase at times of falling interest rates. Both government bond and stock markets can respond positively to rate cuts, and negatively to rate rises. Also, higher-risk corporate bonds can show some correlation with stock markets – both are sensitive to the economic cycle and corporate health. With this in mind, it is not enough to buy a bond fund and hope that it will protect you through any market turbulence.
There are also difficulties in bond markets today as the yield gap between shorter and longer-dated bonds has widened. Ed Smith, chief investment officer at Rathbone Investment Management, says: “You can’t rely on a negative correlation between longer-dated government bonds any more like you could during the first two decades of this millennium – another reason we still prefer shorter-dated bonds and seek diversification within other parts of the portfolio.”
You can outsource the complex decisions on fixed income allocation to a strategic bond manager, who will aim to hold a diversified portfolio of bonds, but also adapt to changing market environments. The TwentyFour Dynamic Bond fund, for example, is designed as a core fixed income allocation to be held throughout the economic cycle. The specialist team will adjust the portfolio to target new opportunities or mitigate risks as market conditions evolve.
Alternatively, you can build a portfolio yourself. This might include a strong corporate bond option,
such as GAM Star Credit Opportunities, which focuses on credit analysis, alongside the M&G Global Macro Bond fund, which aims to take advantage of macroeconomic trends and mispricing within fixed income markets.
Alternatives
In the current market environment, a balanced portfolio is likely to have some exposure to alternative asset classes. King says: “We believe diversification within and across asset classes will be a key theme for investors to consider for 2026. One area that has been out of favour is bond proxy alternatives, many of which offer attractive entry points for the patient investor.
“Falling rates offer a potentially better environment for these rate-sensitive assets which are currently under owned and, in sectors like infrastructure and listed real estate, the income profile means investors are paid handsomely (and via regular and consistent payments) to wait for the market to re-rate.” On the Chelsea list, we have the FTF ClearBridge Global Infrastructure Income fund, which could be an option for investors.
Balance is likely to be particularly important in the year ahead. The US administration is
unpredictable and the consequences for individual sectors difficult to judge. Making sure your
portfolio isn’t vulnerable to any one area could be crucial to sustaining consistent returns.
