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Rethinking equity allocation from a global perspective

Gene Podkaminer Vincent Fu

KEY TAKEAWAYS

  • Equities exert an inescapable gravitational pull on many portfolios’ allocations, typically as the largest single source of risk. We explore how to think through the starting point and tradeoffs across regions and styles.
  • The relationship between political borders, country of domicile and revenue attribution has changed materially over the last three decades, and we examine approaches to structuring an equity portfolio in the current macroeconomic regime. 
  • Common equity approaches, such as overweighting small-cap, value or international equities, have significantly underperformed a simple cap-weighted approach over the past 15 years. This challenges conventional wisdom and highlights the risks of deviating from a neutral benchmark without strong conviction.
  • In this paper, we conclude that investors may benefit from starting with a globally diversified equity portfolio as a neutral starting point. This approach avoids arbitrary regional segmentation and allows for more thoughtful, flexible allocation decisions that reflect the full opportunity set.

For many asset owners, public equities represent the largest allocation of capital, and often risk, in their overall portfolio. While structuring a global public equity portfolio has evolved over time, given market developments over the past 15 years, we wanted to sharpen our thinking around regional correlations, country of domicile vs. geographical revenue attribution and the efficacy of an active management approach. Our analysis suggests that investors may benefit from an approach to public equity that applies skillful stock selection across a global opportunity set, rather than prioritizing regional mandates or other subsets of the public equity universe.

 

Due to the relatively high level of volatility associated with holding equities, it’s hard to escape their gravitational pull on total portfolio risk and return. Among public asset classes, equities are associated with significant risk (and expected return), whether in your home country or externally. Other exposures, such as interest rates and inflation, can certainly impact the total portfolio, but the magnitude stemming from equity is simply greater. Given how much risk is at stake, it makes sense to spend the time carefully thinking through and crafting an equity portfolio.

 

Whether you’re structuring a defined benefit pension plan’s allocation, designing a foundation’s portfolio or the equity sleeve of a target date glide path, equities almost certainly play a central role in the associated risk-return tradeoffs.

 

For the in-depth analysis, please download the full report below.

Download PDF

Gene Podkaminer is a senior asset allocation strategist with 25 years of industry experience (as of 12/31/2024). He holds an MBA from Yale School of Management and a bachelor’s degree in economics from the University of San Francisco.

Vincent C. Fu is a senior client specialist with 21 years of investment industry experience (as of 12/31/2024). He holds an MBA from New York University and a bachelor's degree in business economics from the University of California, Los Angeles. 

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