Produced in partnership with Capital Group.
Almost half of asset owners plan to make material asset allocation changes due in part to concerns about overheated equity markets, according to the 2025 CIO Sentiment Survey, a global collaboration between Top1000funds.com and Casey Quirk, part of Deloitte Consulting.
With the global economy in flux, as the US retreats from the rest of the world, asset owners are grappling with unprecedented events and challenges.
For the past few years, listed equities, particularly US equities, have been one of the biggest return drivers of multi-asset portfolios, however, CIOs are increasingly wary of high valuations, causing a growing number to decrease both active and passive equity allocations in favour of core fixed income and alternatives, the report found.
And now, with market volatility continuing, investors need to look at the geographical diversity of their portfolios.
According to Jeremy Cunningham, investment director at Capital Group, heightened geopolitical concerns, inflation and the new US administration are among the factors that have the potential to challenge many of the certainties that have underpinned investment positioning in recent years.
“Investors need to be prepared for several potential outcomes in 2025 and should think through probabilities to build resilient portfolios that should do well in the most likely outcome but that, importantly, have the ability to pivot if outcomes change,” he says.
For institutional investors, a truly global approach to fixed income can beef up the resilience and robustness of their broader portfolio by providing exposure to a diverse, multifaceted and often varied investment universe, Cunningham says.
Derek Walker, head of portfolio design and construction, total funds management, CPP Investments, lists US debt sustainability and uncertainty around US economic policy as one of the group’s top concerns.
Speaking at Top1000funds.com’s Fiduciary Investors Symposium in Singapore in March, Walker said CPP Investments spent considerable time thinking about its portfolio and the key risks.
“The real challenge for our portfolio is around US debt sustainability and policy makers testing the limits in terms of what’s possible, and that’s for a couple of reasons including the diversification benefits you get from fixed income in a world where there are debt sustainability issues and increased risk premia as you go out the curve,” he says.
“These are the things that are going to start shifting around correlations that would otherwise be helpful in hedging a portfolio but may be much less so in this world.”
Walker said, until recently, investors hadn’t really had to project the impact of a US debt sustainability crisis.
“As they say, if the US sneezes, the world catches a cold, so if the US gets the flu, it’s even worse given US fixed income underpins the global economic system,” he said.
“A world where tariffs are going up, prices are rising, and supply chains are getting reorientated leads to higher inflation and greater volatility, potentially more volatile growth. One possible silver lining is the potential for greater diversification across geographies.”
Leigh Gavin, deputy chief investment officer and head of portfolio strategies at Australian superannuation fund, Cbus Super, agrees that what happens in the US drives global fixed income markets.
“For a small economy like Australia, our 10-year yield tends to be heavily swayed by what’s going on in the US as well as domestic factors so we started the year thinking that the majority of Trump’s policies would likely be, on the margin, inflationary so tariffs, tax cuts and the like,” he says.
“All things being equal, you may have thought that by year-end, 10-year bond yields would be closer to 5 per cent than 4 per cent, and the thing that has changed is that Trump and [Scott] Bessent [US treasury secretary] have said they are targeting the long end of the yield curve and trying to get that down, and a key strategy to achieve that is reprivatising debt in the US.”
Cbus does not allocate to credit in its fixed income portfolio. It has a “relatively pure” exposure to fixed income that is focused on G-7 government bonds.
According to Gavin, the role of Cbus’ fixed income portfolio is to provide good protection in a crisis, particularly a deflationary crisis, which may occur if fears of a recession in the US become more pronounced.
“Our focus is on portfolio protection, particularly in a recessionary environment. We don’t make a lot of active tilts within the portfolio,” he says.
More than geography
While geographic diversification is important, building a robust, diversified global strategy relies not only on identifying where the opportunities lie but understanding the counter-factual opportunities or, put another way, the strategies that provide diversification to the broader portfolio, Cunningham says.
“Having identified these strategies, it is then important to size the positions appropriately to ensure the desired level of risk is captured,” he says.
Although the main risk sources in the global universe are still rates, curve, credit spread and currency risk, today there are also much deeper and varied sub-sets of these primary risk groups.
One example of this variation, according to Capital Group, can be observed through the rapid evolution of the emerging market debt asset class, which has experienced strong growth in the EM local currency sovereign sector, the EM corporate sector, and index-linked bonds.
“Most EM countries have moved away from pegging their currency to the US dollar and instead have free-floating exchange rate regimes, which afford active global investors multiple routes to capture added value and provide diversification to the broader portfolio,” Cummingham says.
Another meaningful evolution has been the inclusion of China and India in the emerging market debt universe.
Since China’s inclusion in the index in 2019, it has grown to represent nearly 10 per cent. India was added in 2024.
“Investors need to consider the influence of both countries on the global economy and not just the US,” Cummingham says.
“This is particularly important given that US and China’s economic cycles have often exhibited low or negative correlation. They can therefore provide divergent influences on a portfolio, depending on the opportunity being considered. Similarly, Indian government bonds have historically had a low correlation to other global assets and so can provide further diversification benefits.”
Next best place
According to Anthony Skriba, senior consultant at Casey Quirk, 2025 will likely be an “inflection point” for institutional investors, as markets start to peak, and the impact of trade policy start to manifest in economic systems.
The 2025 CIO Sentiment Survey found the trend of institutional money flowing into alternative assets like private infrastructure, private equity and private credit continued, despite ongoing exit challenges.
“There is a very strong possibility that alternatives globally are somewhat over invested,” Skriba said, citing fixed income as “the next best place” to be, despite concerns that there is “a lot of capital chasing limited returns, or what might become limited returns over the next few years”.
Cummingham said the changing economic and geopolitical environment called for investors to rethink their core fixed income allocation and take a more global view to beef up the resilience and robustness of their broader portfolio.
