With global tensions rising and the global economy facing short-term headwinds, investors are being reminded that diversification is not just a theory. It is a practical and essential strategy for reducing risk.

At Cantor Fitzgerald Ireland, our Optimum Range of Discretionary Model Portfolios goes beyond standard risk measures like ESMA volatility bands. These bands, set by the European Securities and Markets Authority (ESMA), group investment funds into risk categories based on how much their value moves up and down. While useful as a basic guide, they do not fully capture real-world risks. That is why we go further, using advanced tools to build portfolios designed to withstand market uncertainty and keep clients on track.

Why correlation matters

One of the biggest risks investors often overlook is something called correlation risk. This refers to the risk that different investments in a portfolio might all lose value at the same time.

For instance, many investors assume that holding both stocks and bonds offers protection. Normally, when stock prices fall, bond prices rise. But in 2022, that did not happen. Both asset classes dropped together, meaning investors experienced losses across the board. A typical passive portfolio with a 50/50 split between equities and bonds would have fallen by about 12 percent in 2022. Our Optimum Moderate strategy, which carries a similar level of risk, dropped by just 9.4 per cent. This represents an outperformance of 2.6 per cent.

Looking beyond traditional assets

Bonds have traditionally helped balance out risk in equity-heavy portfolios. But when bonds and equities start to move in the same direction, their ability to protect is reduced. That is why we monitor these relationships carefully and continuously look for other ways to diversify.

Diversification is not just about owning different types of assets. It is about having a mix that behaves differently under different conditions.

Adapting within each asset class

We also apply a tactical approach within each asset class. The goal is to protect the portfolio from short-term shocks while positioning it for long-term gains.

When inflation rose sharply in 2022 and interest rates increased, we adjusted our equity exposure by favouring more defensive sectors like healthcare, consumer staples and utilities. These areas tend to perform more steadily in challenging environments. We focused on companies that are less volatile and have solid financials. On the bond side, we increased our allocation to shorter-term bonds, which are less affected by rising interest rates, and reduced exposure to lower-rated credit.

Alternative assets played a key role as well. Gold provided real value due to its low correlation with equities, its long history as an inflation hedge and its reputation as a safe-haven asset. Infrastructure investments also contributed meaningfully, offering consistent income, lower volatility and higher dividend yields than traditional equities.

A stronger risk framework

Underpinning all of this is a robust risk management framework. We use advanced quantitative models that help us assess how assets might behave under stress, identify potential weaknesses in liquidity and understand how portfolios are likely to respond to various market events. These include copula models which are more accurate for assessing stressed market conditions, liquidity-adjusted Value at Risk to account for liquidity constraints, and multi-factor regression analysis to decompose risk exposures.

Measuring performance and risk

Here is a summary of our Optimum Moderate strategy, built for investors who are comfortable with a medium level of risk and are seeking balanced, long-term growth:

As of 24/05/2025 Cantor Fitzgerald, Bloomberg. Average is calculated over a 3-year period.

Volatility shows how much the value of an investment moves up and down over time. Higher volatility means more frequent or larger price swings.

Value at Risk (VaR) estimates how much a portfolio could potentially lose over a certain period.

The right kind of diversification

In the end, diversification is not just about owning lots of investments. It is about having the right mix of assets that can protect you in tough times and support long-term growth.

With our Optimum Model Portfolios, our team uses a multi-layered approach to risk management, designed to look beyond the obvious. This helps ensure that our clients navigate changes in market conditions with greater confidence.

In summary

True diversification is more than just spreading investments across different areas. It means understanding how those assets behave together and making the right changes at the right time. At Cantor Fitzgerald Ireland, we actively manage risk using a range of tools and strategies, including correlation monitoring, tactical asset shifts and exposure to alternatives like gold and infrastructure. These levers allow us to build stronger portfolios, helping our clients weather the storm and stay on course for their long-term financial goals.

Written By Leonardo Mazza, Head of Cross Asset Strategy and Fund Manager, Cantor Fitzgerald Ireland

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