Diversification “simply did not work” in 2011, but will be revived once macro risks stop being the predominant driver of returns, says Wasington DC-headquartered Convergent Wealth Advisors in its latest Market Pulse report.

In the short term, the firm expects to see risk assets “flock together” but for returns to diverge eventually based on fundamental factors.

For now, in this “tug of war” between valuations and macro uncertainty, Convergent favors a neutral position on overall stock exposure with a tilt towards US dividend-paying companies and “beaten-down” emerging markets.

However, the firm expects a tough environment for stock picking for now due to high correlations between stocks, with correlation between stocks comprising the S&P 500 near record levels.

After a good year for government bond investors, extremely low yields mean expectations should be tempered going forwards, especially when accounting for the effects of inflation, says Convergent. The firm is underweight core fixed income, and within this position is shifting towards opportunistic segments such as multi-sector, emerging market debt and mortgages. It views these as an opportunity to collect yield while addressing inflation, currency and US interest rate risk.

Convergent is overweight gold, and overweight real assets generally, as a safe haven and paper currency hedge.

Meanwhile, pending home sales were at their highest level since April 2010 in December, as buyers took advantage of an expiring tax credit. Nevertheless, the US wealth manager remains underweight on the sector as mortgage and sales activity are depressed by historical standards. It will be “some time” before overall foreclosure rates return to a normal level, according to the report – something that could signal a return to new borrowing and sales activity.

In other calls, the firm is neutral on the dollar, which has benefited from a preference for Treasuries but will be weighed down long-term by the Fed’s loose monetary policy and the country’s debt burden.