Spreading risk: A matter of philosophy

There have been weekly inflows of $2 billion into European equity funds. This represents the largest weekly inflow in just over two years, according to Lipper data (quoted by Citi research).

Notably, recent European inflows were broad-based: both US and rest of world-domiciled funds recorded net inflows, suggesting a geographically diverse group of investors is starting to warm up towards Europe. This is against the backdrop that positioning is still heavily tilted towards the US.

Several of our competitors follow a market capitalisation-based approach in their regional equity allocation. We run a US equity exposure that is below market cap. This isn’t based on a dynamic view of the market – at the moment, we don’t have one that favours either Europe or the US – it is a matter of philosophy.

We are hardcore believers in spreading our risks over assets, sectors, regions, countries and currencies. Instead of market cap, we look at multiple factors including a GDP-weighted approach. If we were to allocate to developed market equities based solely on market cap, more than two-thirds of that equity allocation would be invested in just one region: North America.

We are not comfortable with such a large exposure to US, given that it has become increasingly dependent on the performance of its largest constituents, with the majority of US equity performance in 2022 and 2023 driven by just a handful of companies. Though the current political and policy uncertainty coming from the US will have implications for global equity markets, it still underlines our conviction that it isn’t wise to put all our eggs in one (political) basket.

US equities outperformed Europe significantly in the years running up to including the pandemic. However, the recent performance record is more nuanced. The year-to-date rally has been so strong that the Euro Stoxx 50 has now outperformed the S&P500 in local currency terms over the last three years and kept pace in common currency terms. 

It might be the first crack in the bastion of US exceptionalism and, dare I say, it might show the prudence of spreading risks.”

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All data sourced from Bloomberg as at 21 February 2025.