Multi-asset pension portfolios must be able to move in and out of asset classes quickly to make the most of diversification, says Barings Asset Management.

Research by Barings shows that the volatility of major asset classes means managers must have the conviction to diversify and not be constrained be traditional asset allocation models.

Percival Stanion, head of asset allocation at Barings, said: "This data clearly demonstrates how volatile markets can be with the performance of some asset classes reversing over a very short period of time. For example, overseas bonds were the worst performing asset class for two consecutive years over 2005 and 2006, yet in 2008 they were the best performing asset class. Japanese equities were the second best performing asset class in 2005 but dropped to the second worst by the following year."

Stanion added that the purpose of multi-asset investment is to take advantage of the returns when they are available and to take risk off the table when the environment deteriorates.

"Having recently experienced some real anomalies in the correlation between different asset classes, the dispersion of returns is now reverting to longer-term extremes. It is our view that the days of maintaining exposure to all asset classes for the sake of diversification are over. We believe you will be rewarded for taking dynamic asset allocation decisions, above all, to protect against risk."

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