This paper examines how structural shifts across markets are reshaping expected returns and portfolio construction, with a focus on changing correlations, policy dynamics, and investor behavior. It highlights that traditional diversification assumptions may be less reliable, especially as cross-asset correlations have risen meaningfully in recent years.
A tale of two decades for U.S. and non-U.S. equity: Past is rarely prologue
Vanguard
Research
10 Pages
Key Takeaways
Correlation Regime Shift: Stock bond correlations turned positive in recent years, reducing diversification benefits that historically lowered portfolio volatility by ~20–30%.
Policy Driven Markets: Central bank balance sheets expanded by over 300% since 2008, increasingly influencing asset prices and compressing risk premia.
Return Dispersion Rising: Cross sectional return dispersion increased by ~25%, creating more opportunity for active strategies versus passive benchmarks.
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