Mix and match

At first glance, a global equity portfolio might seem well-diversified. But a closer look at market concentration suggests otherwise. The US dominates global equity markets, accounting for 66.6 per cent of total market capitalisation, while other major economies such as the UK and China make up just 3.1 and 2.4 per cent, respectively (see Figure 1). Given this imbalance, investors may question whether their global exposure is as diverse as it appears.

Market concentration is another crucial factor. Looking at the 12 largest equity markets, we measured the percentage of total market capitalisation held by the top ten, top three, and single largest stock in each country (see Figure 2).

The US is one of the least concentrated markets. Switzerland stands out as one of the most concentrated markets, highlighting how some indices rely heavily on a few dominant players. Taiwan’s numbers stand out because it is overwhelmingly dependent on one company – Taiwan Semiconductor Manufacturing Company (TSMC) – which alone accounts for 53 per cent of the country's total market cap.

However, looking at equity exposure through a purely geographical lens can be misleading. A US listing does not necessarily mean a company’s business is US-centric.

Many of the world’s largest US-listed firms – particularly in the technology sector – derive a significant portion of their revenues from international markets. Figure 3 shows the revenues of the ‘Magnificent 7’, seven mega cap tech stocks that have dominated returns in US and global equities in recent years.

Consider how a European consumer might interact with US companies; they may rely on Microsoft software, shop on Amazon, use Meta’s social media platforms or own Apple products. These companies, while headquartered in the US, generate revenue globally.

This global reach might suggest that investors are already sufficiently diversified within US equities. But history shows that regional diversification remains essential. Since early 2000, the US has been the top-performing developed equity market only once (see Figure 4). Equity leadership rotates, and exposure to multiple regions can help investors capture growth in different market cycles.

Sector diversification also plays a critical role. Since 2000, the best-performing sector in the US has frequently changed (see Figure 5).

While technology has been the strongest sector in six years, energy has also led six times, showing how different macroeconomic environments favour different industries. Investors focused too heavily on one sector, or one region, risk missing out on opportunities elsewhere.

Volatility is the price investors pay for equity returns. Markets tend to rise over the long term, but short-term fluctuations can be severe. Historical data shows that while most years deliver positive equity returns, intra-year drawdowns can be significant (see Figure 6).

The financial crisis of 2008 and the market turbulence of 2022 serve as reminders of how quickly equity markets can reverse course. Periods of heightened uncertainty expose investors to sharp declines, reinforcing the need for assets that can provide stability.

When equity markets experience drawdowns, investors often turn to bonds for protection. Looking back at the early 2000s, the S&P 500 posted three years of consecutive annual declines in equities, falling nine per cent in 2000, 12 per cent in 2000, and 22 per cent in 2001.

Meanwhile, global bonds delivered positive returns, providing a critical buffer for multi-asset portfolios (see Figure 7). While this is just one period in time, it highlights a fundamental advantage of fixed income: historically, bonds have helped cushion portfolios during equity market downturns.

Since 2000, global sovereign bonds have consistently provided downside protection in equity sell-offs. Across the eight largest equity drawdowns (measured over three month rolling periods), global bonds have generated positive returns, offering investors much-needed resilience (see Figure 8).

This pattern has played out consistently, reinforcing the role of bonds as a counterweight to equity volatility.

The historical data extends even further. Looking at performance across full market cycles, bonds have outperformed equities and cash on average by a wide margin during recessions dating back to 1950 (see Figure 9).

What’s more, over nearly five decades, the bond market has only delivered negative annual returns five times. This consistency underscores why bonds remain a core allocation in multi-asset portfolios, particularly for investors seeking to manage risk and preserve capital. 

For decades, the traditional relationship between equities and bonds provided a natural hedge for multi-asset investors. When equities fell, bonds typically rallied, creating a negative correlation that smoothed portfolio returns. This pattern was particularly strong in periods of low inflation, such as the 2000s and 2010s.

However, more recently, this relationship has changed. In 2022, following the COVID-19 pandemic, inflation surged to new highs. Consequently, equities and bonds began moving in the same direction, weakening the diversification benefits of a traditional 60/40 portfolio (see Figure 10).

Rising interest rates and inflation shocks led to simultaneous declines across both asset classes, leaving investors with fewer places to hide. With equity‑bond correlations shifting, the need for alternative sources of diversification has never been more relevant.

One option is alternative assets, which can include real assets (such as infrastructure and real estate), private credit, absolute return funds, hedge funds, and commodities. Historically, gold has been a notable example of an asset that has outperformed both bonds and equities in certain market environments, providing a valuable hedge against inflation and currency debasement (see Figure 11).

But how do alternatives impact portfolio performance? Analysing a traditional 60/40 portfolio and comparing it with a portfolio that includes alternatives highlights the benefits.

The data shows that adding alternatives (represented by gold and an absolute return fund) reduces volatility, improves annualised returns and enhances the Sharpe Ratio – a key measure of risk-adjusted performance (see Figure 12). This suggests that incorporating alternatives can strengthen portfolio resilience, particularly when traditional asset correlations rise.

However, alternatives come with trade-offs. They tend to be more expensive, often requiring higher fees and longer investment horizons. Liquidity constraints can also be a concern, as some alternative assets may not be as easily traded as equities or bonds. 

Building a resilient multi-asset portfolio requires looking beyond simple allocations. A thoughtful approach – balancing equities, fixed income and alternatives – can help investors navigate uncertainty and capitalise on opportunities across market cycles.

In an era of changing correlations and evolving risks, true diversification remains the cornerstone of successful multi-asset investing.