Asset Allocation Research for UK Advisers

Contrary to the old adage, when it comes to investing, desperate times do not necessarily call for desperate measures. In fact, far from it. Ensuring that a portfolio is sensibly allocated and diversified should help to mitigate the adverse effects of political or economic shocks such that the knee-jerk reaction to get out of the market can be resisted: an ‘All-Weather’ strategy.
 
When constructing multi-asset portfolios for DFMs and advisory firms, our process at Elston begins with four primary categories: equities, fixed income, cash & equivalents, and alternatives. We classify any investment that falls outside the first three groups as an alternative. The fundamental motivation for including this category is diversification so it is essential that we verify that the holdings in question are actually fulfilling that role.

Defining the alternatives space for All-Weather investors
Historically, property has been the dominant choice for advisory firms seeking alternative exposure. This often comes about because of the way in which it fits specific risk profiling or asset allocation models used. Unfortunately, these frameworks are in many cases restricted in terms of the number of distinct asset types they can effectively model, so the full breadth of opportunity is missed.
 
To drill down, we would start by dividing the alternatives universe into two distinct categories:

1. Alternative assets (“Different Things”): This includes tangible or specialized exposures like infrastructure, gold, commodities, and property. We make a clear distinction between physical property and property securities. While they share similar economic drivers over the long term, they offer different trade-offs regarding liquidity and reported volatility—the latter often being a result of how frequently they are valued.
2. Alternative strategies (“Doing Things Differently”): This refers to investment methods rather than just the underlying assets. Absolute return funds, for instance, might hold traditional stocks or bonds but apply risk management overlays to target a specific performance hurdle and mitigate losses. Risk-weighted and long-short equity models also sit within this bracket.

Essential factors for sizing an allocation
When building an alternatives allocation to sit alongside the broader All-Weather portfolio, three criteria are vital:

• Return contribution: ideally, these holdings should offer returns that meet or exceed the performance of the equity, bond, and cash mix for a given risk level.
• Risk contribution: the volatility added by these assets should ideally be comparable to, or lower than, the rest of the portfolio.
• Correlation structure: this is perhaps the most critical yet complex metric. If a selection of "alternative" holdings behaves exactly like the equity or bond components during a market shift, they offer diversification in name only. For true benefit, they must exhibit low or zero correlation with traditional assets. Modern portfolio theory shows that integrating uncorrelated assets allows the total portfolio risk to be lower than the sum of its individual parts—the classic "free lunch" of investing.

An adaptive strategy
Because we define our multi-asset models by their equity risk, we place Alternatives within the “non-equity” portion of the strategy. Investment approaches vary; some managers avoid Alternatives entirely, which proved challenging during the decade of near-zero interest rates when bonds struggled. Others maintain fixed weightings, which suits a static strategic view. However, we prefer an adaptive model that shifts the balance between Bonds and Alternatives based on the prevailing outlook for inflation and interest rates.
 
When rates and inflation are climbing, tilting toward Alternatives as part of an All-Weather strategy is prudent. As inflation cools and interest rates begin to pivot, increasing the bond weighting at the expense of Alternatives often becomes more attractive. Ultimately, the specific mix within the Alternatives sleeve remains flexible, guided by expected returns, risk, and - most importantly - how well those assets decouple from the rest of the market.

The ‘global savings grab’ – demand for capital is rising.

The world is gradually moving towards currency diversification.

Reports of the death of public markets are exaggerated.

Join us for our upcoming webinar sharing our latest investment outlook.

​Higher inflation means lower real returns on bonds. UK gilt yields look attractive on paper, but once you strip out inflation expectations, investors are getting less than 1% in real terms. For some, that's reason enough to look beyond the traditional 60/40 portfolio.

When inflation is on the rise, nominal assets such as Cash and traditional Bonds (Gilts and Corporate Bonds), lose their real (inflation-adjusted) value.
The face value of the coupon they pay every 6 months, and the promise to repay the holder a face value of £100 in 10, 20 or 30 years time, looks increasingly less valuable than the paper its written on.
Bonds and Cash cannot adjust for inflation.  That’s why a £5 note buys you less than it did 10 or twenty years ago.

By Henry Cobbe CFA, Head of Research at Elston Consulting.
Elston Consulting provides asset allocation insights and fund research to UK-based investment managers and financial advisers as support to their investment committees.
For UK investment managers and financial advisers only

In this article we explore the Iran conflict’s impact on the economy and the stock market.  In a related article we explore why Trump started the war with Iran.

By Henry Cobbe CFA, Head of Research at Elston Consulting

Elston Consulting provides asset allocation insights and fund research to UK-based investment managers and financial advisers as support to their investment committees.
For UK investment managers and financial advisers only

In this article we explore the geopolitical issues around the conflict.  In a separate article we consider the impact on the economy and the stock market.

In this video, we explore how the recent Iran conflict is creating a new oil and energy shock — and what that means for the global economy and investment markets

In this video, we break down the rapidly evolving Iran–US conflict and explore how a major geopolitical shock has unfolded with far‑reaching consequences for global stability and financial markets.

by Henry Cobbe CFA, Head of Research, Elston Consulting
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1. The US/Israel conflict with Iran threatens to slow growth and re-accelerate inflation
2. Similar to 2022, the combined risk of stagnant growth and persistent inflation, or “stagflation,” is negative for Equities and Bonds alike until there’s an end insight to the oil supply shock
3. The facts have changed since the outlook at the start of the year, portfolios should also reflect the changing risk outlook

How to ensure portfolio resilience
We explored this topic in our recent CPD webinar - within and across each asset class.  But given recent geopolitical events, it makes sense to look under the bonnet of the VT Avastra Global Diversified Assets fund (which we consult to), to consider what alternative asset class exposures can act as the best shock-absorbers to 1) structural change from AI, 2) rising geopolitical tensions in the Gulf and 3) the debasement trade.  For these, we turn to what we have named the "COGs" for a portfolio - Copper, Oil and Gold.

Watch the explainer video about COGs

The US broke off negotiations with Iran and together with Israel launched a series of massive strikes against Iran with the aim of decapitating the regime, neturalising air defences and naval assets, and laying the groundwork to enable a popular uprising against a degraded regime.

The US equity market dominates market-cap weighted indices.  A market-cap weighted approach results in a concentration in the tech sector.  Whilst this has helped US equity performance historically, it has held it back - in relative terms in 2025.  So where should investors allocate if they wish to diversify away from the US?

A bloody start to the year
The beginning of the year saw pro-regime change protestors being brutally and lethally crushed.  Trump threatened Iran with intervention if the crackdown didn’t stop leading to an uneasy truce.

Are equity markets in an AI bubble? Is AI a bubble? These questions crop up everywhere – from client meetings to magazine covers – and reflect a broad sense of unease. When people ask about “bubble trouble,” what they really want to know is whether markets have become dangerously detached from reality. Here’s how we at Elston think about it: what the data shows, what history suggests, and – crucially – what we’re actually doing in portfolios.

The adoption of AI tools is accelerating rapidly.

Which companies are the winners and which are the losers from the AI revolution?

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Well it stopped the Europeans talking about Venezuala!

The Trump administration’s geostrategic focus on security for the Western hemisphere, dubbed the “Donroe” doctrine, can be simplified as keeping US interests up in the Americas and Russian/Chinese interests out.