RISK-ON or risk-off is a relatively permanent question for many active investors that tends to have implications across the spectrum of asset classes.

Certain assets, such as equities or currencies, are perceived to be risk-on while others are believed to be safe havens - or risk-off.

The latter are generally the type of assets investors will turn to when economic or market conditions do not look favourable.

Deciding whether the environment is risk-on or risk-off is difficult enough for investors in the prevailing environment, which has seen the market distorted by quantitative easing (QE).

However, it is becoming increasingly difficult to identify assets that fall firmly into either of those camps.

This could explain why some investors have given up trying and are turning instead to a passive approach that utilises index tracker funds.

In practice whether an asset class is risk-on or risk-off will depend very much on the drivers of any particular market episode.

For example, gold might be a better safe haven than gilts in a high-inflationary environment, whereas gilts might be a better safe haven than gold when the economy slows and there is less demand for gold jewellery.

It is also very important to consider what state the assets are in before the episode starts.

For example, if bonds are extremely overvalued with low yields their safe-haven potential will be more limited.

It can certainly be argued that QE has forced the price of defensive assets to rise, with the result being that some are seen as not being as safe as they once were.

Many commentators would argue that they look vulnerable to setback and would take many other assets down with them.

Even if all of these factors are considered, it is unwise to expect a mechanical knee-jerk response from asset classes, with correlations often changing significantly over time.

For example, in the sharp sell-off in equity markets in the final quarter of last year asset classes behaved as most text books would predict.

Indeed, shares and high-yield corporate bonds fell while traditionally defensive assets such as gold and government bonds rose in value.

Throughout the period there was a fairly consistent relationship between these two groups of assets in that as risk-on assets fell risk-off assets rose.

Importantly, from the point of view of portfolio diversification, when risk-on assets began to sell off materially in December, the safe havens provided a much needed degree of shock-absorption.

However, more interestingly perhaps, in the first quarter of 2019 the correlations changed and all assets, both risk-on and risk-off, rose.

Why might this be? Perhaps there was a ‘disagreement’ between the two asset categories and at some point one will be ‘proved right’.

Or, more likely, a sudden reversal of direction by the US Central Bank the Federal Reserve in January, which, after raising rates and tightening policy, started to indicate that rates might have peaked.

This appears to have driven all assets higher, with investors extrapolating that this will have a similar impact to the QE period, when the cheap money headed in all directions and a rising tide lifted all boats.

The conclusion is that the traditional characteristics of asset classes which may have been distorted by QE cannot always be relied upon and that investors will have to become more sophisticated in their approach.

When traditional assets do not perform as expected some have turned to alternative investments, whether these be absolute return funds, property or more esoteric investments such as fine art.

Perhaps the answer is to build in more diversification to your portfolio and include as wide a range of assets as possible when it becomes increasingly difficult to rely on the traditional characteristics of traditional asset classes.

Such a strategy should smooth performance as there will be a great mix of some assets performing well while others are lagging.

David Thomson is chief investment officer at VWM Wealth.