Diversification
Looking Beyond Traditional Stocks and Bonds
16 Sep 25 5 min read
2025 has been anything but predictable. Inflation is still higher than we’d like, global politics feels tense, and supply chains continue to shift. With that kind of backdrop, it’s natural to wonder: Where can I invest without losing sleep?
The good news is that you don’t have to stick with just traditional equities and bonds. We think by mixing in a few different types of investments - like listed infrastructure stocks, real estate investment trusts (REITs) and absolute return funds - you can build a more diversified portfolio that can help prepare for whatever comes next. Let’s explore how these assets work and why they could help.
Goodbye “Great Moderation”, hello new world
For decades, markets enjoyed low inflation and steady growth. That era, sometimes called the “Great Moderation”, lulled many of us into expecting smooth sailing. But times have changed. Today, geopolitical tensions and shifting trade rules are reshaping how money moves around the globe. In fact, global trade hit nearly US$33 trillion in 20241 - a huge number, but one that can be disrupted if cross border relationships sour.
The year 2025 has demonstrated that placing investments solely in one area, such as US equities, can leave portfolios exposed to a change in economic conditions. Which is what we saw this year: sticky inflation, higher tariffs and increased tensions among countries. One way to deal with this uncertainty is to spread your bets across different asset classes.
Why real assets help portfolios feel sturdier
If you’ve ever owned rental property or lived near a busy toll road, you know that physical assets can throw off regular cash flow. That’s the appeal of “real assets” like infrastructure and real estate. Their revenues often grow with inflation, and they provide diversification versus global equities and bonds.
When you invest in infrastructure stocks or REITs, you’re getting exposure to companies that own things the world needs: power grids, cell towers, warehouses and senior living communities. Even in rocky markets, people still switch on the lights, order packages and use their mobile phones.
Figure 1: Correlations between Global Fixed Income, Global Equities, Core Infrastructure and REITs. Green indicates some diversification while red shows returns moving together.
Source: FE analytics. Correlation is based on total returns in GBP. Past performance is not a guide for future returns. Returns between 31/07/2015 to 31/07/2025. Correlation guide: Low is 0-0.2, Moderate-Low is 0.2-0.4, Moderate is 0.4-0.6, Moderate-High is 0.6-0.8, High is 0.8-1. MSCI World represents Global Equities, Bloomberg Global Aggregate GBP Hedged represents Global Fixed Income, MSCI World Core Infrastructure represents Core Infrastructure and MSCI World/REITs represents REITs.
Getting to know listed infrastructure
Think of listed infrastructure as buying shares in companies that keep society running. These might be utilities, toll road operators or telecom towers. Because demand for their services doesn’t fluctuate much, their earnings can be steadier than things such as tech startups. Plus, they’re central to big trends like electrification and digitalisation. If AI continues to take off, who’s going to power all those data centres? Infrastructure companies.
U.S. electricity demand actually rose 2% in 2024, ending years of flat growth1. That jump is tied directly to data centres and cloud computing. And there is more to come as global electricity demand from data centres is projected to more than double over the next 5 years according to the International Energy Agency (IEA)2. When you invest in listed infrastructure, you’re buying into that growth story with the added comfort of inflation linked revenues.
REITs: having exposure to property without becoming a landlord
REITs are like mutual funds for property. They give you exposure to property like office blocks, apartment complexes, logistics warehouses and even healthcare facilities - without the headaches of fixing boilers or chasing tenants.
As shopping habits shift online and hybrid work becomes the norm, some traditional property sectors have struggled. Meanwhile Logistics hubs are being supported thanks to e-commerce, while housing and healthcare properties are helped as populations age and cities grow.
REITs offer several benefits for investors. For example:
- High dividend yields: In the UK, REITs are required to pay out at least 90% of the income profits of their rental businesses each year, which often results in higher than average dividend yields compared with other stocks.
- Liquidity and ease of trading: Many REITs trade on major stock exchanges, so you can buy and sell shares just like any other listed company. That’s a big plus if you don’t want your money tied up in a physical property for years.
- Diversification: REITs returns don’t move in lockstep with global stocks and bonds, helping smooth portfolio ups and downs.
Overall, REITs provide stable income, diversification and an accessible way to participate in property markets.
Absolute return funds: a toolkit for any weather
Absolute return strategies may sound complicated, but the idea is straightforward: their aim is to make returns no matter which way the market moves. Instead of just buying stocks or bonds, absolute return managers might sell “short” some stocks or bonds they expect to fall or use hedging strategies to manage risk. That flexibility can help smooth out the bumps.
The catch? Not all absolute return funds are created equal. Because techniques and risk profiles differ, choosing a skilled manager is essential.
Putting it all together
With inflation still elevated, politics unsettled and stock valuations high, many investors are asking how to build portfolios that aren’t tied to one outcome.
Here’s how alternatives assets can help:
- Infrastructure offers stable, inflation-linked income and exposure to long-term trends like energy transition and digital growth.
- REITs let you tap into property markets without the hassle of being a landlord, while offering high dividends and inflation protection.
- Absolute return funds provide a flexible tool to navigate market ups and downs.
Ultimately, the key is diversification. By spreading your investments across multiple asset classes and regions, you’re less dependent on any single market’s fortunes. That way, whether inflation stays high, interest rates rise or geopolitical tensions flare, your portfolio has a better chance of riding out the waves - and maybe even catching some unexpected tailwinds along the way.
Past performance is not a reliable indicator of future performance. The value of an investment can go down as well as up and your client may get back less than they’ve paid in.