Key takeaways:
- Equity markets have evolved, leaving some core global equity allocations less aligned with their original objectives. This is being driven by rising market concentration, and a greater need for selectivity and broader diversification.
- Active versus passive need not be a binary choice. Passive exposure can be an efficient solution in highly researched markets, while active management may be better suited to less efficient areas where company selection can add value.
- A smarter global equity allocation combines both approaches; passive in efficient markets and deploying active risk where alpha potential is the greatest.
Global equities offer attractive valuations and exposure to powerful secular themes, with real diversification benefits and the potential for long-term growth. Gaining exposure has typically been straightforward for much of the past decade – buy the broad market, with US mega-caps being a large default allocation of the portfolio and allow a handful of exceptional companies to do much of the heavy lifting. The next decision would have been which approach to take: Active or passive?
But thinking in a more pragmatic and practical manner, a more useful question would be: When and where does each approach make the most sense? While a purely passive approach may have worked well, it is based on the assumption that the global equity allocation is naturally diversified and suits every market environment. Some equity markets, for example US large caps, offer exposure to innovative global leaders and are well covered by research analysts, but these highly efficient markets are hard to beat consistently. Others like US small and mid-caps, and some ex-US stocks are less well researched, offering greater stock and sector return dispersion. These markets are more likely to be rewarded by active judgement.
We believe a smarter global equity allocation recognises those market differences and builds portfolios around them. For investors seeking a core global equity allocation that can unlock innovation and new opportunities, combining active and passive may create more ways to win.
