Multi asset: adapting to an expensive expansion

So far, 2026 has been a strong year for our All Roads multi-asset franchise. The turbulence caused by rising interest rates has been accommodated through direct commodity exposure and volatility strategies, while equities have performed well, after a weak Q1. Commodity prices are now higher, interest rates are elevated, and the real economy is once again facing inflation. The world has become more expensive, perhaps for good reason. In the terminology of All Roads, the economy currently fits an ‘improving growth’ regime, which supports cyclical assets while also leading to rising costs.

The following is an excerpt from the Q4 issue of Simply put, where we shift focus from last quarter’s ‘what if real yields settle higher?’ to refocus on the balanced outcomes that can arise from high rates. All Roads accommodates this growing expensiveness – a historical novelty for a franchise born in 2012. A more expensive expansion could last some time, and the strategy has evolved to adapt. This latest Simply put explains how.

Ensuring effective investment diversification

The current regime is distinct from ‘slowing growth’ and ‘inflation’ regimes. Several indicators support this assessment. Economists’ forecasts have gradually improved; the European Central Bank and the US Federal Reserve have revised their growth projections upwards for both 2026 and 2027; and the International Monetary Fund expects 75% of the world’s economies to grow above their potential in 2026. The improvement in the growth outlook is therefore visible across a broad range of forecasts. The question now concerns what happens next.

These regimes do not last forever, but they can persist longer than initially expected. Figure 1 provides a historical perspective by showing the regimes observed one, three, six and 12 months after an initial ‘expanding growth’ signal, alongside their long-term frequencies. Expanding growth is observed in roughly four out of five cases one month later. Its frequency falls below half of cases at both three and six months, and to around 30% of cases after 12 months – when declining growth becomes the most frequent outcome, approaching half of observations. Inflation shocks become more frequent at longer horizons but remain less common than declining growth.

FIG 1. Regime frequencies one, three, six and 12 months after an initial expanding growth signal, compared with long-term regime frequencies¹

This pattern supports persistence over the near term while leaving the next phase of the cycle open; it does not establish a systematic passage through inflation before growth slows. The current improving growth phase appears to be only beginning, although extending that assessment across several quarters requires continued reassessment. It also comes with its own distinctive features: renewed commodity volatility and the elevated cost of capital are making investors nervous. Understanding those features is essential to translating the economic diagnosis into an allocation that ensures effective investment diversification.

Read also: Good growth, bad rates? When higher bond yields take centre stage

What makes this cycle different?

Regime analysis is useful and should guide the broad direction of asset allocation. It is equally important to understand the specificities of the current environment. This is where the second ingredient of All Roads becomes especially relevant: the risk model. Its role is to balance the opportunities created by the prevailing regime against the risks that accompany it.

Identifying a favourable economic environment is one part of the investment process; understanding how its risks are distributed across assets is another. Commodity prices have risen sharply and now contribute around one percentage point to inflation across the major economies. Their rise has been far from linear, with pronounced fluctuations driven by geopolitical developments. Interest rates have also increased to levels that represent a risk for the global economy, but the volatility of asset returns tells a more differentiated story. A key issue is therefore the best way of diversifying portfolios against commodity risk.

Figure 2 compares the recent evolution of volatility in the S&P 500, iShares 20+ Year Treasury Bond ETF (TLT) and the Bloomberg Commodity Index (BCOM). The renewed spike in commodity volatility during 2026 has been accompanied by intermittent increases in equity volatility, which have remained below the major peaks seen in 2022 and 2025. TLT volatility, meanwhile, has remained comparatively subdued and below its 2022–2024 levels.

FIG 2. Evolution of volatility in US equities (S&P 500), bonds (TLT) and commodities (BCOM), 2021–2026²

The commodity shock has therefore not coincided with a similarly sustained increase in volatility across all three assets. An elevated cost of capital and the volatility of bond returns are distinct risks, and the risk model needs to recognise both.

This distinction matters for All Roads. Launched in 2012, the strategy spent its early years in an environment of low and relatively stable interest rates, while commodities experienced a decline lasting a decade. The current environment still fits the economic regimes that lie at the heart of All Roads’ design, but at the moment, the risks within those regimes are fluctuating. A familiar growth regime can therefore require a different approach to dynamic asset allocation when the behaviour of its underlying assets changes. The risk model underpinning the investment process must account for that evolution. Section 2 of Simply put explores how it does this.

Understanding the longer-run opportunity set

The central question for All Roads this quarter, therefore, is how to balance risks and returns in the current environment. The favourable growth regime has become more expensive, creating downside risks for markets that were not foreseen at the beginning of the year. Among these risks, the cost of capital deserves particular attention, or in simpler terms, the high level of interest rates. ‘Higher growth, higher rates’ probably best summarises the distinctive nature of the current regime.                                                                                                                                                                                      

What does the combination of higher growth and higher rates imply for prospective returns? Answering that question requires bringing in the common denominator between growth and rates: productivity. Its evolution is essential to understanding how stronger growth and a higher cost of capital can coexist – and what that coexistence means for investments. The level of rates alone cannot settle the question. It needs to be considered alongside the sources of growth.

Read also: The other bond borrower: how AI debt competes with US Treasuries

Carry, a measure of expected returns central to the All Roads approach, provides a way to examine this relationship. Figure 3 relates starting carry to performance 10 years later for bonds (A) and equities (B), distinguishing productivity-led growth from its opposite, input-led growth, and high-rate from low-rate environments. In the bond panel, higher starting carry is associated with stronger subsequent performance, although the fitted relationships differ across those environments. The equity panel shows a similar relationship between carry and subsequent returns. It also includes more pronounced subsequent returns during periods of productivity-led growth and high rates, including at relatively low levels of starting carry. These observations are consistent with the central point: elevated rates need not preclude positive future returns when growth is supported by productivity. The relationship between carry and subsequent performance nevertheless differs across asset classes and economic environments; this makes the combination of growth, rates and starting carry more informative than the level of rates alone.

FIG 3. 10-year expected returns as a function of starting carry, by source of growth and interest rate regime³

There is another feature of higher rates worth appreciating. As discussed in Simply put Section 3, they impose greater pricing discipline, potentially limiting the formation of bubbles. This is part of the current cycle’s distinctive character and needs to be taken into account when assessing its opportunities.

A higher cost of capital can coexist with a favourable environment for returns, provided the broader economic conditions support it. Diversification nevertheless remains necessary, given the risks described earlier. All Roads can play a central role in this respect as a liquid alternative within portfolios, as detailed in Section 4.

All Roads’ hedging strategies, and the way their behaviour varies across regimes, can strengthen its investment diversification properties should risks come to outweigh the return opportunity. Section 5 of Simply put examines this aspect of the strategy.

Simply put, this improving growth regime has turned expensive, and All Roads is adjusting to it.

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