Alternatives – delivering on portfolio resilience

• Alternatives weakness is flipside of equity and bond strength.
• There was a material risk to markets outlook from the energy shock
• Portfolio insurance was worth it relative to the risks faced

When the conflict in the Gulf started, and the Strait Hormuz closed to shipping, the world was staring down the barrel of the largest energy shock in history.

A tale of two quarters

In the first quarter, the value of having incorporated portfolio resilience proved valuable.
Similar to the Russia/Ukraine war and energy shock of 2022, the combination of recession risk and energy-driven inflation drove both equities and bonds down.  Bonds failed as a diversifier.
In 1Q26 World Equities were down -3.86%, Gilts were down -1.80%, diversified Alternatives were up +3.34% all in GBP terms (see notes).

2q26 (feared) - a re-run of 4q73?
The last time the Gulf was shut to shipping and there was a similar energy shock was the OPEC oil embargo relating to the 1973 Yom Kippur war in October 1973.  To get an idea of directionality for key asset classes, in 4Q73 Equities were down, bond were flat, Alternatives were up*.

2q26 (actual) – phew: insurance not needed
In the end, the combination of a ceasefire, political negotiations and the astonishing resilience of both the AI-driven step-change in equity markets and broader earnings resilience across equities, meant that for our three key asset class buckets, in 2Q26 World Equities were +14.75%, Gilts were +0.61% and Alternatives -2.09%.  Whilst investors are sensitive to negative returns, Alternatives are doing their job – providing differentiation and diversification.

What was the cost of insurance
The relative performance between Equities and Alternatives was +16.84%, and between Bonds and Alternatives was +2.70%,  The allocation to Alternatives applied to this relative performance is the cost of insuring against that negative 4Q74 style scenario.
As with any insurance policy, the premium is worth it, and one should be glad if you don’t need to use it.
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The fog of war
A calm has returned to markets, with AI and tech once again dominating the headlines.  Hindsight investing is easy.  The world was a different place in March 2026, and the priority for asset allocators was to ensure that portfolios had defensive diversifiers in place, in case the Strait remained closed for longer and the then-real risk of a recession.

We recommend our investment manager and financial adviser clients to remain diversified within and across asset classes.  And it is real-life scenarios like this that explains why.

Notes
​For 1q26 and 2q26, Equities are represented by a world equity index fund, Bonds by a a gilts index funds, and Alternatives by a Diversified Asset Fund.  Return figures in the charts are in GBP.
Ffor 4q73 figures, equities are represented by S&P 500 Index bonds by US 10 Year Treasury Index and Alternatives by the Bloomberg Commodity Index.  Return figures in the chart are in USD.