News & Insights

Geographical equity allocation is becoming increasingly binary, with the dominance of US stocks limiting meaningful tactical asset allocation at the country level.

Discretionary fund managers (DFMs) should consider shifting towards sector-based allocation, which offers greater opportunities for diversification, better risk-adjusted returns and more control over unintended factor exposures.

Key Takeaways

• Globalisation has eroded the benefits of geographical diversification – The rising interdependence of global economies and the concentration of US stocks in equity markets have reduced the effectiveness of country-based asset allocation.
• Sector allocation provides a broader opportunity set – Sector-based investing allows for more meaningful tactical adjustments, lower correlations and a greater ability to generate excess returns compared to geographic allocations.
• DFMs must evolve or risk lagging their peers – Adopting a sector-focused approach requires changes in investment philosophy, processes and reporting. Those who fail to adapt may struggle to add value in an increasingly concentrated and correlated global market.