Approaching the boundary

We believe we may be close to some significant boundary conditions which could influence economic conditions, market returns and correlations. As a result, we think that a simple extrapolation of the past as a proxy for the future would be very unwise, making it important to challenge the status quo of multi-asset investing.

What’s in the paper?

In this paper, Newton’s CEO Euan Munro discusses a number of important boundaries which could have major consequences for economies and financial markets. Given these boundaries, he explains why he believes it is critical to reassess the norms of multi-asset investing, such as the classical 60/40 balanced fund, and consider a more flexible approach to diversification.


In economics, just as in physics, it is reasonable to assume that a system will continue behaving as it did before, provided that you are not close to any critical boundary conditions. However, when boundaries are reached, this can lead to the common (but also foreseeable) error of overfitting models of the future by using historic data.

In this paper we explain why we believe we are approaching some important boundaries, including in relation to climate change and its impact on economic growth, China’s economic rebalancing, and the scale of sovereign debt and central banks’ balance sheets. We believe these factors could have significant implications for market returns, volatility, and the correlation between asset classes.

Consequently, we contend that basing a multi-asset portfolio design for the future on the experience of the recent past could be a huge mistake. We suggest that, instead of artificially constraining portfolios to have a fixed equity/bond structure, clients may be better served by unconstrained multi-asset strategies where the only constraint is the absolute level of risk.

Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.