The dollar dilemma: combatting hidden risks

Despite ongoing political uncertainty and a sharp decline in the value of the dollar, US equities have continued their upward trajectory, hitting new all-time highs. However, with stock valuations hovering near historic highs, some multi-asset investment strategies that adopt a market-cap approach to regional equity markets may be exposed to elevated risks.

The strong performance of US equities in recent years has been a major driver of global equity returns. On a market-cap weighted basis, US equities now represent 66% of the MSCI ACWI. Within the MSCI USA Index, the 'Magnificent Seven' tech giants account for more than one-third of the index – a testament to their extraordinary growth. It is also interesting to observe that in 2015, the top ten holdings in the index were diversified across various sectors whereas it is now much more concentrated on tech stocks riding the artificial intelligence narrative. This surge has been nothing short of remarkable, reshaping the global equity landscape and significantly amplifying returns for investors following a market-cap weighted investment approach.

Elevated valuations

However, while elevated valuations among the ‘Magnificent Seven’ are well documented, the continued stream of strong returns has reinforced the belief that their growth story will simply run on and on. Yet, this narrative risks overlooking valuation concerns that could challenge future performance.

Regional equity valuations compared to long-term average  

Source: Guide to the Markets UK, JPMorgan, 20 August 2025. Earnings data is based on 12-month forward estimates.

Let’s think about this for a moment. We know US equities now account for a staggering 66% of the global equity index – that is up from 58% five years ago and 52% a decade ago. So, what will that figure be in ten years? They are highly unlikely to experience the same growth as over the last decade and climb to 78%. Even if there is no further growth – that 66% figure represents significant concentration risk being absorbed into portfolios who follow a market-cap weighted approach and a high allocation to one single currency diluting the typical benefits of broad diversification. Surely, investment decisions should be guided by a more forward-looking and rational assessment of future market dynamics, with greater attention paid to other regions and sources of diversified growth?

The importance of risk targeting

A forward-looking investment approach would naturally result in a lower allocation to US equities compared to solutions adopting a market-cap weighted approach. However, it is not just about geographic and currency exposure – it is about ensuring the portfolio remains aligned with the risk appetite of the investor. By continuously adapting to evolving market conditions and future expectations, risk-targeted strategies offer a more robust framework for managing uncertainty and delivering consistent outcomes.

So, the theory is sound, but let’s consider a real-life example by looking at the Quilter WealthSelect Managed Active 5 Portfolio and considering its risk-targeted objective.

The asset allocation approach taken by the portfolio managers is intentionally dynamic. They rebalance the portfolio quarterly but have the flexibility to undertake ad hoc tactical rebalances at their discretion to take advantage of market opportunities or manage risk. The rebalances also involve reviewing forward-looking capital market assumptions to ensure an optimal strategic asset allocation remains in place over the long term. This forward-looking approach allows the portfolio management team to implement their investment conviction, whilst also keeping a sharp focus on the risk profile over both the short- and long-term.

Meeting future challenges

Strategies that rely on a market-cap weighted approach to regional equity allocation have undoubtedly benefitted from elevated exposure to US equities in recent years. However, with markets encountering increased uncertainty, the need to prepare for what lies ahead has never been greater. In this context, risk-targeted solutions – with their ability to adapt asset allocation in a controlled and forward-looking manner – may be best positioned to deliver resilient outcomes in an evolving investment landscape.

Published: September 2025