Chart depicting the weight of the top 10 companies in the S&P 500, the Magnificent 7, and the long-term average from 1995 through 2026. As of May 31, 2026, the latest figures were 39%, 34%, and 23%, respectively.
At BBH, we are partners in our clients’ success. That means helping preserve and grow wealth over long periods of time, but also continually questioning whether yesterday’s portfolio construction assumptions are sufficient for tomorrow’s market environment.
Our core investment beliefs remain the same: prudent asset allocation, high-quality investments, thoughtful risk management, disciplined manager selection, prudent rebalancing, and client-specific portfolio construction. What has changed is the opportunity set. Public and private markets have evolved, fixed income once again provides meaningful income, equity markets have become more concentrated, the path of inflation remains uncertain, and the era of zero interest rate policy (ZIRP) has ended.
This does not call for a dramatic reinvention of portfolios. It requires an enhanced framework with more tools - what we’re calling “portfolio construction 2.0.” Investors should still rely on public equities for long-term growth and high-quality fixed income for income, stability, liquidity, and deflation protection. However, many clients can benefit from additional return engines, each serving a different role and purpose in a well-constructed portfolio:
- Private markets
- Real assets
- Independent return strategies
- Tax-aware equity approaches
- Carefully selected credit opportunities
Portfolio construction 2.0 moves beyond traditional asset class labels toward building portfolios around a larger opportunity set to better define the job that each allocation plays. A broader toolkit can diversify return sources, improve resilience, and better align portfolios with each client’s goals, objectives, liquidity needs, tax situation, and risk tolerance.
The market environment has changed
For much of the decade following the global financial crisis (GFC), investors were rewarded for owning long-duration financial assets. Low inflation, falling interest rates, abundant liquidity, and steady globalization provided a powerful tailwind for equities, fixed income, private equity, and real estate. When capital was cheap and liquidity abundant, many assets benefited from the same rising tide. In that environment, a traditional equity and bond portfolio often did much of the work.
Today, fundamentals and security specifics matter more. Companies face different costs of capital, artificial intelligence (AI) opportunities and threats, refinancing risks, labor dynamics, and competitive environments. That dispersion can create opportunities for active equity managers, credit specialists, long/short managers, tax-aware equity strategies, and other approaches that seek returns from relative winners and losers, not just market direction.
These shifts do not invalidate the use of traditional asset classes, but they do raise the standard for our approach to portfolio construction.
The current environment for public equities is more nuanced than it has been in over decade. Equity markets have produced strong returns, but leadership has been unusually narrow. As of May 31, 2026, the 10 largest companies accounted for nearly 41% of the S&P 500, more than doubling their weight in just 10 years. This is not an argument against owning these companies – many are exceptional businesses with durable competitive advantages, strong balance sheets, and substantial free cash flow. It is an argument for knowing what drives outcomes. When broad equity exposure becomes increasingly dependent on a small number of companies, sectors, and themes, selectivity and diversification by return source become more important, not less.
When broad equity exposure becomes increasingly dependent on a small number of companies, sectors, and themes, selectivity and diversification by return source become more important, not less."
Accordingly, public equity returns have become more concentrated, and forward-looking expectations suggest beta alone may not be sufficient to meet client goals. While the S&P 500 has compounded at over 14% annually over the past 15 years (as of May 31), we do not expect a repeat. Our 20-year capital market assumptions project a 6.4% nominal return for U.S. large-cap equities (and inflation of 2.5%). Taking out inflation, our clients are looking at a 3.9% real return excluding potential benefits from asset allocation moves, tax alpha, or manager selection.
Chart depicting the Fed funds midpoint of target range, the longer run target, and the 10-year real yield across the post-global financial crisis normalization, the COVID-19 pandemic, inflation shock and aggressive hikes, and the higher for longer rate period (2014 through 2025). As of June 30, 2026, the latest figures were 3.6%, 0.03, and 2.2%, respectively.
Fixed income has also changed. After years of historically low yields, bonds once again offer meaningful income. As of May 31, 2026, the 10-year U.S. Treasury yielded 4.4%. That starting point creates a very different role for bonds than during the near-zero rate period and is why we have extended duration across client portfolios over the last four years.
At the same time, bonds have not always provided the same offset to equity volatility that investors came to expect. The International Monetary Fund (IMF) recently observed that stock-bond diversification has become more difficult since 2020 because stocks and bonds have tended to move in tandem during sharp market selloffs, particularly in a world shaped by inflation and supply shocks. Fixed income still matters greatly, but now it has multiple jobs, and investors should be clear about which job it is expected to perform in each portfolio.
The opportunity set has expanded meaningfully, with more tools to generate return – including new active management strategies, tax-efficient structures and strategies, independent return streams, and private investments. Notably, there are now more exchange-traded funds (ETFs) than listed stocks in the U.S., reinforcing the need for the same discipline in selecting ETFs as in private equity strategies.
Chart depicting the number of U.S. ETFs vs. the number of U.S. publicly listed companies. As of December 31, 2025, the latest figures were 3,908 and 4,719, respectively.
Taken together, today’s public equity and fixed income markets make the case for portfolio construction 2.0 – not a new portfolio for its own sake, but a more purposeful way to combine traditional and complementary return engines.
From asset classes to return engines
Asset allocation remains critical. Most investment industry conversations still begin with asset allocation: How much should be in public equities, fixed income, cash, private investments, and other categories? However, we believe investors should also ask a second question: What return engines are we relying on?
Diversification should be judged not by how many labels a portfolio contains, but by how many different ways it can succeed. A portfolio can appear diversified across asset classes while still being dependent on the same underlying forces: low interest rates, rising equity multiples, abundant liquidity, or continued dominance by a small group of companies. Conversely, a portfolio can be more resilient if its components are designed to perform different roles across different market environments.
Diversification should be judged not by how many labels are in a portfolio, but by how many ways the portfolio can succeed.”
We think about these roles in practical terms.
- Public equities provide long-term inflation protection and growth.
- Fixed income can provide deflation protection, income, stability, and liquidity.
- Real assets can provide unexpected inflation protection.
- Independent return strategies can generate attractive returns with lower beta to public equity markets.
- Private equity can provide access to a larger universe of companies, illiquidity premiums, operational improvement, and differentiated sources of alpha.
- Tax-aware strategies can improve what ultimately matters most for many families: after-tax compounding.
At the end of the day, our differentiation is not about any single asset class – it is how we underwrite, combine, and manage strategies at the total portfolio level. We aim to move away from labels and toward purpose. The question we repeatedly ask ourselves is, “What role should each allocation play, and are we being adequately compensated for the risks, liquidity terms, complexity, taxes, and fees involved when combined with other return engines?”
Diversifying return engines within public equity
Within public equities, we strongly believe in the long-term benefits of holding high-quality equities. Given their strong business models, long-duration competitive advantages, and pricing power, ownership of such companies can help preserve and grow capital in a tax-efficient manner. However, we believe that many investors can benefit from additional exposure to other public equity strategies.
Incorporating complementary public equity strategies can also enhance return and reduce risk. For example, we could utilize passive and tax-managed equity strategies to improve after-tax outcomes, client flexibility, and our ability to make tactical adjustments. Passive exposure can also be used strategically so that active risk is taken where it is most compelling, including less liquid and higher alpha opportunities. In addition, we can utilize diversifying public equity strategies such as systematic equity and equity extension strategies, which tend to perform differently from concentrated fundamental equity strategies. When put together, this creates a more resilient portfolio that is finely tuned to preserve and grow wealth.
Private markets are no longer a side note
One of the clearest examples of market evolution is the growth of private markets. According to Preqin, private equity assets under management (AUM) increased from $607 billion in December 2000 to $9.7 trillion by September 2024. The number of U.S. private equity-backed companies grew from roughly 1,800 in 2000 to nearly 11,800 in 2024, while the number of U.S. firms publicly listed fell from roughly 6,900 to about 4,010.1
This matters for portfolio construction because the investable universe has changed. Private markets can provide access to companies, assets, and forms of financing that are not fully represented in public markets. Private equity, for example, has become a primary channel for financing the buildout of data centers, networks, and power grids tied to AI deployment. In other words, private capital is increasingly financing the physical infrastructure of innovation.
None of this means private markets should be owned indiscriminately. In fact, the growth of private markets makes discipline more important. We think critically about opportunity cost, manager quality, liquidity, vintage year diversification, unfunded commitments, fees, tax efficiency, and downside cases. A private markets allocation should be large enough to matter, but not so large that it creates unintended liquidity concerns or prevents clients from taking advantage of opportunities during market dislocations. The goal is not to own more complexity, but rather to own more intentional sources of return.
The goal is not to own more complexity, but rather to own more intentional sources of return.”
Independent return is a role, not a product label
Another important evolution is the growing relevance of independent return strategies. We define independent return strategies as compelling investment opportunities seeking to generate equity-like returns with low beta to public equity markets. These strategies are not a single asset class. They can include opportunistic, event-driven, insurance-related, multistrategy, structured credit or equity, royalty-related, and other less easily categorized approaches. They can also be accessed in both liquid and illiquid form.
The appeal is straightforward: If equity markets are more concentrated, fixed income is not always a reliable offset to equity volatility, and private markets require careful liquidity planning, then clients may benefit from strategies where returns are primarily driven by manager skill, structural inefficiencies, or idiosyncratic opportunity rather than broad market direction.
We have previously described independent return strategies as the “quiet workhorses of sophisticated portfolios.” That phrase is important because these strategies are not meant to be fashionable. They are meant to serve a role. They can help smooth compounding, reduce behavioral risk, provide potential liquidity or rebalancing flexibility during dislocations, and create another way for a portfolio to earn returns when traditional markets are less cooperative.
As with private markets, the bar for independent return strategies should be high. Exceptional managers that can generate strong after-fee, after-tax returns independent of public equity and fixed income markets are rare. In our view, independent return strategies require the same rigorous manager selection discipline we apply elsewhere: people, passion, perspective, willingness to progress, philosophy, process, portfolio management, partnership, principles, and prospective returns.
What does this mean for client portfolios?
Allocating to asset classes and investment strategies that represent a diversified set of return drivers will be an increasingly important determinant of portfolio returns over the next decade. Our increased focus on areas of market inefficiency, changing market and macroeconomic dynamics, and diversified factor exposures should help drive returns in an environment in which beta, or market exposure alone, may be inefficient to meet client goals and objectives.
Looking ahead, success will depend on how intentionally each component contributes to achieving a client’s goals. That is the essence of portfolio construction 2.0: disciplined asset allocation, thoughtful diversification, and the utilization of a broader set of return engines tailored to the unique needs of the client.
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1 Source: Preqin, McKinsey, World Federation of Exchanges. Data as of December 31, 2024.
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