Higher allocation to Europe-ex-UK a route to greater diversification

Added 3rd June 2016

High correlation between equity markets continues to hamper diversification efforts, according to Societe Generale.

Higher allocation to Europe-ex-UK a route to greater diversification

In a report Friday, SG said expected returns had improved due to a reduction in volatility and cross-asset correlation. The correlation between bonds and FX, as well as equity and bond prices have all declined recently, the bank said.

However, correlation between equity markets remains near its peak meaning there are limited benefits to diversifying by investing across equity markets, SG said. This is particularly problematic when you consider that equities have witnessed improved expected return over the past three months.

To combat this, SG advised going underweight equities generally, but weighting more toward Europe-ex-UK equities within the allocation.

While Europe-ex-UK equity exhibits marginally higher volatility, due to lower correlation with other asset classes, stated SG, it provides a better diversification opportunity, thereby reducing portfolio volatility.

Reallocation from government bonds to inflation linkers and corporate credit will also help to reduce volatility, according to SG.  Because “the efficient frontier has moved up, indicating an improving risk-adjusted return environment,” SG suggested portfolio managers are more likely to be rewarded from inflation of bonds than from government bonds, especially with the pace of Fed rate hikes being re-priced.

Although, SG’s Q-Map model confirms that “linkers are great diversifiers”, it also warned that greater diversification could potentially result in lower returns.

“The risk-averse portfolio has less allocation to government bonds and more to inflation-linked bonds, corporate credit and cash,” the report concluded.


Overseas earners will be key amidst 2017 inflation

Sponsored by Neptune

Overseas earners will be key amidst 2017 inflation...

A by-product of sterling weakness is inflation, and we expect this to continue to gather steam over the coming months, with energy and food prices the hardest hit....

Kames Income Hub


Vincent McEntegart, manager of the Kames Diversified Monthly Income Fund, explains how he aims to deliver a stable and sustainable income of 5% p.a.*, paid monthly, by investing in a range of asset classes

Square Mile Research

AXA Distribution Fund
AXA Distribution Fund

Talking Factsheets is a video service for users...

Visitor's Comments Add your comment

Add Your Comment

We won't publish your address



Investment Strategy




PA Alternative Ucits 2017 Congress
PA Alternative Ucits 2017 Congress

Tuesday 25 April
The Langham, London

PA Europe 2017
PA Europe 2017

Thursday 11 May
Furniture Makers' Hall

PA Channel Islands 2017
PA Channel Islands 2017

Wednesday 24 May
Royal Yacht Hotel, Jersey

PA UK Equity 2017
PA UK Equity 2017

Thursday 15 June
Radisson Blu Edwardian Bloomsbury Street Hotel

Sponsored Content

Investment Strategy