Equity markets have enjoyed an exhilarating bull market in recent years, with the S&P 500 surging 60% from January 2023 through to June 2025.
The outperformance by equities, and notably by the US market, has generated an embarrassment of riches from a portfolio context. Equity benchmarks, driven by passive market-cap-index and ETF-flows buying, have left investors with very concentrated exposure.
Now, as investors review their options in mid-2025, what might they consider?
Keep on dancing?
Option A is to 'keep dancing while the music is playing', as Chuck Prince put it in 2007. Unfortunately, this did not end well for Citi and it did not end well for Mr. Prince. In 2008, the MSCI Europe was down 43.3%. This required equities to be up a whopping 76.3% just to recover investors’ capital.
In the past decade, however, painful selloffs have been followed by 'V-shaped' recoveries. 2022’s S&P-500 decline of 19.4%, even when compounded by a sell-off in 'safe haven' bonds as central banks hiked short-term rates, was short-lived. So was the more recent sell-off, between February 19th and April 8th 2025, which took the S&P 500 down 18.9%.
The bond market was again an unreliable friend, particularly the long end. However, the beta tide came quickly in, and investors’ modesty was maintained, as they raised their glasses and cheered “Always buy the dip!”
What goes up can go down (a very long way)
In the late 1980s, Japan was seen as the 'exceptional' country that the US is seen as today. The Nikkei 225, propelled by increased global market-cap-driven allocations from active balanced funds with MSCI World and EAFE [Europe, Australasia, and the Far East] mandates (not to mention FOMO buying) rose to a peak of 38,915.87 on 29 December 1989.
This level was not to be seen again for 35 years, as the Nikkei 225 spiralled down as much as 80% by March 2003.
Investors know they are very overweight equities, particularly US equities. Choosing to not do anything about this is an active decision.
It may be useful to consider what a prudent investor might contemplate now. The 'Prudent Man Rule' comes from an 1830 court case, Harvard College v Amory, which made explicit the requirement for trust fiduciaries to invest assets "as a prudent man would invest his own assets", considering the needs of the beneficiaries, the need to preserve the estate (or capital) and the need for income.
The rule was updated and codified in the Uniform Prudent Investor Act of 1992, which specifically required that trustees should “diversify the investments of the trust”. Hardly controversial, this is well explained in the old adage: “Don’t put all your eggs in one basket”.
Investors may want to consider realising a portion of their super-normal profits to somewhat rebalance their portfolios. For example, an investor could take profits on 25% of their US equities and still be left with 1.2x the exposure they would have deemed prudent back in January 2023.
What to diversify into?
By many metrics, equity valuations now look stretched. Goldman Sachs recently forecasted a paltry 3% annualised nominal total return for the S&P 500 over the next decade. Meanwhile, there is no law saying 2022’s negative performance, let alone 2008’s, cannot be repeated.
In 2022 and again in March-April 2025, bonds have proven not to be the safe haven investors were looking for. Longer-dated government bonds have experienced more Liz Truss-like price movements. CTAs did not help in the recent sell-off. Credit spreads are now trading at almost the tight (expensive) levels last seen in 2007.
Meanwhile, the returns on short-dated bonds look paltry. At the time of writing, one-year US treasuries are yielding only around 4.0%, UK gilts around 3.75%, while one-year French or German bonds yield below 2.0%. Investors might rightly ask whether that is the best return they can aspire to in this part of their portfolios.
Alternatives arrive
Enter uncorrelated liquid alternatives – highly liquid, daily-dealing UCITS funds that are designed to be uncorrelated to traditional assets, thus shielding portfolios from equity or bond market turmoil, while targeting returns significantly in excess of cash, or the risk-free rate available from short-term government bonds.
A return of cash +4% (so around 8.25% in US dollars and pound sterling), if achieved, will provide more than double the return available from short-dated UK gilts or US treasury bonds. In Euro, a 5.9% return is triple the return available from short-dated French or German government bonds.
As investors think back to the depths of the 2025 sell-off before the 'TACO' recovery, Bob Dylan’s line from Like a Rolling Stone, 'how does it feel?' may come to mind. Rather than hearing that music playing, perhaps investors should consider playing their 'get out of (some of your) beta free' card instead?
Donald Pepper is co-CEO and head of multi-strategy at Trium Capital. The views expressed above should not be taken as investment advice.