Top investment considerations for financial advisers 2025
Doubling down on diversification
It’s becoming increasingly difficult to protect investment portfolios from market uncertainty. Understanding what’s ‘beneath the hood’ can help advisers avoid hidden correlations.
In recent years, we have seen extraordinary levels of market concentration with the dominance of the ‘magnificent seven’ tech stocks. Whether that is a mere blip remains to be seen, but concentration certainly makes it harder for actively managed portfolios to outperform.
Rebecca Jacques, Mercer’s Head of Wealth Management Investment Solutions, says financial advisers are now experiencing the effects of major regime changes and economic super-cycles.
“There’s been a convergence in correlations – such as equities and bonds on a simultaneous downward trajectory.” she says.
Three questions advisers can consider as they help their clients navigate the market in 2025:
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What does genuine diversification look like?
Genuine diversification involves spreading risk across asset classes, sectors, geographies, and strategies that do not move in tandem. It goes beyond simple allocation to equities and bonds, aiming to reduce overall portfolio volatility by including uncorrelated or low-correlation exposures.
That means portfolio allocations are increasingly leaning on alternative investment strategies to diversify exposure beyond a more typical equity/bond mix. These strategies include private credit, infrastructure, and hedge funds, which can help reduce reliance on traditional equity/bond mixes. But that brings a new set of challenges for advisers. They may introduce new risks, such as liquidity constraints, complexity or valuation challenges.
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What does diversification really cost?Liquid Alts, real estate investment trusts (REITs) and actively managed exchange-traded funds (ETFs) have all democratised access to assets that were once the domain of institutional investors – creating an abundance of opportunities to diversify beyond traditional equities and bonds.
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Is the portfolio at risk of compounding risks through exposure?A portfolio might appear diversified at first glance but may unintentionally concentrate exposure to specific industries or geographies. Investors and advisors should carefully examine underlying exposures to ensure genuine diversification.
Options to consider
This expanding array of innovative investment products has made it easier to diversify into asset classes that have traditionally been difficult to access, such as private markets or infrastructure. However, investors may be less diversified than they realise. Advisers will need to understand how the underlying assets in a portfolio correlate and interact with one another.
Advisers are encouraged to clearly define strategies they can implement with each asset class and allocation. It is important to consider alignment with active managers who possess deep expertise in the relevant markets – whether those are emerging markets, private credit or infrastructure assets.
There are still opportunities to unlock alpha and diversification, but it is an increasingly delicate balance between risk and opportunity.
“You can’t just switch out high yield strategies or multi-asset credit for private debt,” says Rebecca.
What is the goal of fixed income in that portfolio? If it’s downside protection, Liquid Alts might be a better strategy. If it’s diversification with alpha, perhaps the credit spectrum is more suitable.
Mercer’s Head of Wealth Management Investment Solutions
