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Rebuilding equity diversification: Four levers, one risk budget

Salman Ahmed

Salman Ahmed - Global Head of Macro and Strategic Asset Allocation

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In this paper on equity diversification in an era of geoeconomic fragmentation, we consider how shifts in the macro regime are reshaping the equity allocation debate, creating fresh challenges and opportunities.

Read the full white paper.

Investors must now consider geoeconomic fragmentation, fiscal sustainability risks, the dominance of the AI theme, and the high concentration of market-cap weighted indices when making equity allocation decisions. Within this paper, we focus on four practical levers for implementation and set out a framework designed to link portfolio choices to macro themes while managing tracking error, costs and governance constraints:

  1. Regional breadth reduces reliance on US mega-cap leadership and can improve the balance of equity return drivers.
  2. Factor exposure offers a transparent route “off market cap”, diversifying return drivers across styles and risk premia, while allowing to keep sector exposures within tight ranges.
  3. Active management complements regional and factor tilts by capturing tactical opportunities across stocks, sectors and regions as leadership rotates, alongside security selection.
  4. Currency hedging is no longer a background decision, it can materially shape realised outcomes for non-USD investors.

In addition, we believe investors need to think more broadly about how to make their portfolios resilient in this environment, including adding less correlated exposures such as absolute return and gold, and active duration management for fixed income allocations.

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