Traditional portfolio diversification isn't cutting it anymore. Here's where to pivot, says this $624 billion fund manager.

By Nora Redmond

The traditional portfolio formula of stocks and bonds has been weaker since 2021, according to Allspring Global Investments.

Portfolio diversification is no longer what it once was, especially amid a global bond sell-off, and analysts say it's time to look at more liquid alternatives.

"What we've seen is traditional diversification - that is bonds diversifying equities - has really been weaker, I would not say it's gone, it has been weaker since 2021," Rushabh Amin, portfolio manager for the multi-asset team at Allspring Global Investments, said at a media event in London on Thursday.

It comes after global bond markets shifted from years of low yields to post-pandemic multi-decade highs, with investors' concerns over inflation, government deficits, and increased demand for loans to fund the buildout of artificial intelligence pushing borrowing costs even higher.

"So one of the things that we believe that investors should be doing is looking at how to orient strategies that incorporate things beyond equities and bonds into that portfolio," Amin said. He suggested prioritizing outcome-focused multi-asset strategies, such as cash and inflation strategies.

Allspring, the former asset management arm of Wells Fargo with $624 billion in assets under management and advisement, recommends liquid alternatives, like commodities, which Amin described as being at "the heart of pretty much everything going on in the world today," highlighting the importance of metals, like copper and silver, to the infrastructure of data centers, as well as the boom in the energy market arising from the war in Iran.

The Charlotte, N.C.-headquartered asset management firm has also identified the sectors it sees as being the most likely to feel the impact of the expansion of artificial intelligence, which presents opportunities for investors to start selecting stocks in the space.

"The interesting piece is going to be adoption, and it's going to be how it looks to transform industries going forward," Henrietta Pacquement, Allspring's fixed income chief operating officer and head of sustainability, said of AI.

The firm has compiled a list of industries that are light on physical assets and it terms as having "shallow moats," or, in other words, are at risk of being replaced by AI. It puts software, consumer services, property and casualty insurance, finance, health insurance, asset managers and media in this field.

For Pacquement, it was important to highlight these sectors to make sure investors avoid another "warning signal," like what was seen at the start of the year when software stocks first started to experience a selloff driven by concerns over the potential for AI to disrupt entire business models.

But the firm has also identified industries it sees as potentially becoming beneficiaries of the technology. These are referred to as having the protection of "deep moats," and are HALO sectors, or hard assets, low obsolescence - a term often used to describe stocks seen as resistant to the development of AI.

Here, Allspring places energy, utilities, basic industries, telecommunications, communications and capital goods.

"I have very high hopes that AI is going to be incredibly helpful in terms of energy," Pacquement said, adding that the needs for energy are expanding, adding more opportunities to bring renewable energy sources on to the power grid, while the tech is also transforming the sector by helping to predict temperatures and wind speeds, for example.

The State Street Energy Select ETF XLE has surged 45% this year.

-Nora Redmond

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09-11-26 0319ET