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US shares’ role in a balanced portfolio

This article is part of
The future of US equities

US shares’ role in a balanced portfolio
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The US equity market has always been fertile hunting ground for investors, and the vast majority of client portfolios will have had some allocation to US equities coming into this year.

They have continued to be rewarded by the region’s strong performance, benchmarks having quickly recovered from the pandemic-induced market crash seen in February and March this year.

In many cases, US indices have left other benchmarks trailing in their wake. As a result, some investors may have come to rely on US equities to power the growth portions of their portfolios. And it is not just returns alone that have encouraged them.

“The US is home to the world’s biggest stockmarket, its biggest bond market and its reserve currency, while America is also the globe’s only real military superpower,” says Russ Mould, investment director at AJ Bell.

“Throw in an entrepreneurial culture, a ‘can-do’ attitude and deep pools of capital, and the US has a lot going for it.”

US versus the world

The US’ dominance now also extends to global indices. As of 30 October 2020, the MSCI World index had a 66.8 per cent weighting to the US. The second largest country weight is to Japan, accounting for just 8 per cent of the index.

Pete Drewienkiewicz, CIO global assets at Redington, points out that as recently as January, the US was under 55 per cent of world indices.

It means that investors who believe they have a globally diversified portfolio of equity investments may well be far more exposed to US companies than they realise. At the same time, however, the enduring home bias of many UK clients’ portfolios suggests it is their UK rather than US positions that are increasingly out of kilter with other investors.

Concentrated exposure

Julian Cook, US equity portfolio specialist at T. Rowe Price, says: “There still seems to be relative inertia as it relates to US equities in balanced portfolios, despite the greater exposure to new economy industries and superior free cash flow performance.”

He adds that investors should be thinking more about being globally diversified, and that this “may well include a higher exposure to US equities, but also not to overlook other equity markets that have similar disruptive companies driving significant change”.

Ben Kumar, senior investment strategist at 7IM, takes a slightly different view. “As the US equity market dominates the global equity index at the moment, that is the biggest risk you’d wish to diversify away from.”

He says there are lessons to be learned from history, recalling that in the 1980s, Japan was the biggest equity market in the world, with the result that investors in ‘global’ equities ended up with half of their portfolio in Japanese stocks.