"Synchronized Decline" exposes blind spots; multi-asset allocation strategies need to evolve

Securities Times reporter Tan Chudan

Recently, the situation in the Middle East has remained tense, triggering violent fluctuations in global financial markets. According to traditional risk-averse logic, investors initially expected the “seesaw” effect between various assets to buffer risks. However, with a significant rise in oil prices, global stock markets, bond markets, and most commodities have come under pressure simultaneously, showing a short-term trend of “co-movement.”

For fund advising businesses that have vigorously promoted “asset allocation across major categories” in wealth management over recent years, and for brokerage asset management that continuously employs multi-asset strategies, this round of extreme market conditions undoubtedly poses a severe test. Thus, the Securities Times reporter interviewed several fund advising business leaders and asset management investment managers from various brokerages to try and identify current strategy blind spots as well as future optimization and evolution directions.

Co-movement of major asset categories

In the past week (from March 23 to 27), global capital markets experienced significant volatility. Major U.S. stock indices continuously hit new lows for the year, and gold prices briefly fell below $4,100. This rare “triple whammy” of stocks, bonds, and gold has impacted investors adhering to the principle of major asset allocation.

Regarding the reasons, Yuan Chao, an investment manager at First Capital Securities Asset Management, believes the apparent failure of certain “multi-asset allocation portfolios” has two main causes:

First, there was only “asset diversification,” not “risk diversification.” “The core backdrop of the stock and commodity markets over the past two years has been ‘global liquidity easing, fiscal expansion, and AI leading manufacturing recovery,’ resulting in a highly consistent upward logic for most assets. The core of this market volatility is ‘stagflation trading,’ where all assets sensitive to economic growth and market liquidity, such as bonds, gold, and stocks, may decline simultaneously.” In contrast, cash and anti-inflation commodities like oil have become a “safe haven” in stagflation scenarios. If such assets are missing from a portfolio, it is challenging to achieve risk hedging.

Second, the convergence of fund trading and instability on the liability side exacerbated volatility. Yuan Chao explained that previously, under market narratives such as AI and the dollar substitution, the concentration of trading among various funds significantly increased; at the same time, low-risk preference funds like wealth management products entered the market, causing a severe mismatch between liability stability and the crowded asset side. When risk appetite quickly declines, concentrated redemptions from the liability side can easily trigger liquidity shocks, leading to widespread declines in various assets.

A person in charge of relevant business at CITIC Securities Wealth Committee believes that after several years of rising gold prices, its volatility has significantly increased, exhibiting characteristics similar to equity risk assets.

Traditional strategy blind spots exposed

Since major asset diversification did not completely avoid risks, does this mean that “multi-asset allocation strategies” have failed? Multiple interviewees believe that this round of extreme market conditions has exposed blind spots in traditional strategies rather than a failure of the strategy itself.

A person involved in CICC Wealth’s fund advising business stated, “‘Multi-asset allocation strategies’ have undergone a stress test and cannot simply be deemed ‘ineffective.’ The simultaneous decline of all assets is often caused by liquidity shocks.”

This individual believes that the widespread decline in multi-assets this time has revealed a blind spot in traditional multi-asset allocation: investors often limit themselves to asset diversification, which is only one dimension of risk diversification. Although stocks, bonds, and commodities appear to belong to different asset categories, they may all be exposed to the same macro risk factors, resulting in synchronized declines.

The asset allocation team at Guojin Asset Management also does not believe that the “multi-asset allocation strategy” has become “ineffective.” The team stated, “We have found that coverage of commodity spectra has a significant positive meaning in mitigating turbulence in other assets when geopolitical tensions unexpectedly escalate.”

The team further explained that if a multi-asset portfolio contains too few types of assets or has a high degree of homogeneity, it is likely to underestimate macro risk assessments. This issue usually arises from chasing individual strong assets rather than systematically conducting multi-asset layouts. On the other hand, attempting to cover risks comprehensively does not equate to having no risks. Multi-asset strategies optimize risk exposure through portfolio investments, but the volatility ultimately presented by the portfolio is still directly related to the volatility of the underlying assets.

Liu Bing from CITIC Securities Asset Management Department stated that the core of “multi-asset allocation strategies” lies in reducing non-systematic risks rather than eliminating all risks. Traditional allocation models are based on the assumption of “long-term stable low correlation” between assets. However, in “black swan” events like geopolitical conflicts, a single risk factor dominates pricing, causing the correlation of various assets to rise sharply in the short term, which is a normal manifestation under extreme systemic risk.

Optimization of asset diversification dimensions

What insights has this round of extreme market conditions brought to investors, and how should institutions adjust their investment strategies? This has become a focus of market attention.

Liu Bing believes that it is essential to be wary of highly crowded assets and optimize diversification dimensions. He stated that this round of market conditions indicates that asset crowding is an important prior signal of tail risks. When a single asset or strategy is excessively favored by the market, its correlation with other assets will also sharply increase during crises, leading to the ultimate “failure of diversification.” “The superficial logic of traditional ‘asset diversification’ is insufficient to withstand such resonance-style declines; it needs to extend to ‘factor diversification’ by allocating assets across different risk factors like inflation, interest rates, and geopolitics, thereby reducing the impact of a single factor shock on the portfolio.”

This viewpoint is also endorsed by a person involved in CICC Wealth’s fund advising. This individual stated that there is a need to further strengthen the emphasis on portfolio risk management. Drawdowns not only concern clients’ short-term tolerance but also represent a kind of “volatility tax” — the larger the drawdown, the higher the required recovery increase, which accelerates the loss of long-term compounding.

This individual also believes that the future “multi-asset allocation strategy” has two evolution directions: first, expanding from a single asset risk parity to macro factor risk parity; second, imposing stricter target volatility constraints in model implementation or placing greater emphasis on tail risk characterization in risk models.

A person in charge of relevant business at CITIC Securities Wealth Committee also stated that one should not view the risk-return characteristics of various assets with a static, mechanical perspective. The risk-return characteristics of major asset categories like gold, bonds, and equities are dynamically changing and require dynamic assessment. Additionally, from the perspective of asset allocation, it is necessary not only to analyze the characteristics of each asset itself but also to carefully analyze the correlation and hedging relationships between assets in order to build a more resilient portfolio.

Yuan Chao also believes that the core of major asset strategies is that asset diversification cannot remain at a simple category diversification level; it is necessary to clarify the main risk points in the market at different time dimensions and to preset different macro event evolution paths. He also emphasized the importance of recognizing the value of cash allocation, strengthening position control of risk assets, and reserving sufficient liquidity to respond to market fluctuations.

The asset allocation team at Guojin Asset Management stated that when selecting assets, the underlying sources of risk must be fully considered. The included assets must be sufficiently broad, and this breadth does not refer to a high quantity but rather to the richness and dispersion of the driving factors behind asset prices. Under the core strategy of “heavy allocation, light timing,” the low correlation of allocations may allow for better navigation through volatile market environments.