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WHAT TO OWN IN A FRAGMENTED WORLD

2025 has so far been the year of uncertainty, with U.S. political developments triggering massive volatility across equity markets, leaving investors with a conundrum on the most appropriate path forward.

"Diversification serves as an antidote to uncertainty," write Man AHL portfolio managers and strategists, led by global head of client portfolio management Tarek Abou Zeid.

"While we cannot predict which markets will outperform, maintaining broad exposure across regions and asset classes serves to manage risk in fragmented market conditions."

Historically, it might seem wise to allocate to a global equity index to regionally diversify, such as MSCI's all country world index .MIWD00000PUS.

But the U.S. makes up almost two-thirds of the index, given its outperformance over a number of years and recent performance of the so called Magnificent Seven stocks of Apple, Amazon, Alphabet, Nvidia, Microsoft, Meta and Tesla.

"The skew towards the US in market-cap based indices means that this diversification isn't quite as robust as one might think," says Man AHL.

"It leaves investors primarily exposed to the performance of US stocks, which could be a risk if the US continues to adopt what the market perceives as less-friendly policies."

Instead, the firm says that constructing a portfolio that allocates based on maximum diversification (see chart below) mitigates against this by balancing risk across different regions, leading to better long-term risk adjusted performance.

(Samuel Indyk)

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