The first quarter of 2026 gave investors a sharp reminder of something important: just because investments look different on paper, it does not always mean they behave differently when markets are under pressure.
During the quarter, equities fell. Bonds fell. Property also came under pressure, as markets quickly priced in the possibility of higher interest rates following an unexpected geopolitical shock.
The ASX200 total return index finished the quarter down 1.6%. A traditional Australian 60/40 portfolio finished down 0.8%.
For many investors, bonds are expected to provide stability when share markets fall. But Q1 2026 showed that this relationship is not guaranteed. When inflation is the main concern, and interest rates are expected to rise, bonds can fall at the same time as equities.
That raises an important question: what does true diversification actually mean?
It is not just about owning different assets
Most investors understand the basic idea of diversification: do not put all your eggs in one basket.
Holding a mix of equities, bonds, property and cash can reduce the risk of being too exposed to any single investment. But there is a deeper and more important form of diversification: diversification of return drivers, or owning investments that make money for different reasons.
A return driver is simply the underlying force that causes an investment to rise or fall.
For example, equities are often driven by company earnings, economic growth and interest rates. Bonds are also highly sensitive to interest rates. Property is influenced by rental income, borrowing conditions and, again, interest rates.
So while equities, bonds and property may appear to be different asset classes, they can still share some of the same risks underneath the surface.
That matters when market conditions change.
In Q1 2026, the outbreak of the US-Iran conflict triggered a major energy shock. Inflation expectations rose, and markets began pricing in higher interest rates. That one development created pressure across equities, bonds and property at the same time.
In other words, a portfolio that looked diversified by asset class was still exposed to the same underlying problem.
True diversification requires something different: an investment strategy that is not mainly dependent on economic growth, falling interest rates or rising asset prices.
Why a true diversifier can change the portfolio outcome
This is where the idea of the efficient frontier is useful.
In simple terms, it shows the best return an investor can aim for at each level of risk, given the assets available to them. If the assets in a portfolio are all influenced by similar forces, there is only so much improvement that can be achieved by changing the mix. But when a different return stream is added, the portfolio can become more efficient — meaning investors may be able to achieve a better balance between risk and return.
Systematic trend-following strategies are one example of this type of diversifier.
Rather than relying on company earnings, stable interest rates or rising markets, trend-following strategies aim to identify and participate in sustained price moves across a wide range of markets.
Put simply, they look for markets that are moving strongly in one direction and seek to benefit if that trend continues.
Since January 2020, blending a traditional 60/40 portfolio with a 50% allocation to a systematic trend-following strategy would have produced a CAGR of 9.8% with a maximum drawdown of 9.2%. By comparison, the 60/40 portfolio alone delivered a CAGR of 5.1% with a maximum drawdown of 16.2%.
That is nearly double the return and close to half the drawdown.
The key point is not that trend following always performs well. It does not. The point is that it tends to perform well at different times, and for different reasons, than traditional assets.
For a deeper look at how this played out in Q1 2026, including the full market breakdown and performance data, read the State of Trend Q1 2026 report.
What Q1 2026 looked like from inside a trend-following system
The biggest market moves during the quarter came from energy.
Gas oil, or diesel, rose 173%. Crude oil rose 80%. These moves were driven by fears of sustained supply disruption after the effective closure of the Strait of Hormuz.
Across the energy complex — including diesel, crude oil, heating oil, natural gas and gasoline — prices moved sharply in the same direction.
This is the kind of environment trend-following strategies are designed to capture.
The price moves were strong, sustained and directional. These are the conditions where momentum-based strategies can perform particularly well.
But the quarter was not straightforward.
March brought significant volatility. Prices moved sharply, reversed, and then moved again. This kind of back-and-forth movement is common during fast-moving geopolitical events, and it can be difficult for investors to navigate emotionally.
This is where a systematic, rules-based approach can be valuable.
There is a well-known observation from Kierkegaard that captures this idea:
“Life can only be understood backwards; but it must be lived forwards.”
Every trend looks obvious in hindsight. Looking back at a chart, the move in crude oil during Q1 2026 may appear clear. But in real time, investors had to manage uncertainty, volatility and incomplete information.
A rules-based system does not claim to predict the future. Its role is to respond to price behaviour with discipline, rather than emotion.
That discipline can help reduce the behavioural mistakes investors often make — such as overreacting to short-term noise, changing course too quickly, or trying to create a story around every market move.
In our latest interview, I discuss this with Chris Gosselin of Australian Fund Monitors, including how systematic discipline held through the March volatility and what the energy shock could mean for portfolio construction going forward.
Watch: Talking Trend Following, April 2026.
Looking beyond headline returns
Return numbers are important, but they do not tell the whole story.
A more useful question is: how much return did you generate for the level of risk you had to take?
One way to measure this is the MAR ratio. This compares annualised return with maximum drawdown, which is the largest peak-to-trough fall experienced by an investment.
In plain English, the MAR ratio asks: how much return did you earn for each unit of pain endured along the way?
A higher MAR ratio suggests a more efficient return profile.
Performance metrics since January 2020:
- ASX200 TR: MAR of 0.29
- AU 60/40: MAR of 0.31
- SG Trend Index: MAR of 0.38
- ECCM Systematic Trend Fund: MAR of 0.77
The ASX200 and 60/40 figures are particularly interesting. Although the portfolios look very different, their MAR ratios are almost the same.
The 60/40 portfolio reduced drawdown, but it also reduced return. As a result, the overall risk-adjusted trade-off was broadly similar.
By contrast, trend-following strategies showed a different profile. The return stream was more efficient, not just because of how much was earned, but because of how much risk was endured to earn it.
The full statistical breakdown, including Sharpe, Sortino and correlation data, is available in the State of Trend Q1 2026 report.
What comes next
The energy shock of Q1 2026 leaves investors with an important question: was this a one-off geopolitical event, or the beginning of a more sustained shift in the energy and inflation environment?
Systematic trend-following strategies do not need to answer that question in advance.
They are designed to observe how prices are behaving, adapt systematically, and respond as trends develop or fade.
In a world where geopolitical risk is elevated, inflation is harder to predict, and the relationship between growth, rates and markets is less stable than it once was, that adaptability may become increasingly important.
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This article is prepared by ECCM Australia Pty Ltd (ACN 664 662 846), corporate authorised representative of East Coast Capital Management Pty Ltd (ACN 129 976 905, AFSL 339300). It is educational and general in nature and does not constitute financial product advice. ECCM’s funds are available to wholesale clients only as defined under the Corporations Act 2001 (Cth). Past performance is not indicative of future performance.