A Bigger Basket Isn't Always a More Diversified One

Most of us try to be mindful not to put all our eggs in one basket. But the now-familiar concern that most portfolios are quite concentrated in a relatively small group of large US tech companies means that investors may still be doing just that. Their baskets merely look bigger than they really are. What looks like diversification may in fact be exposure to a common set of companies, industries and economic drivers.

It's worth asking, then: What might happen if investors looked beyond a US-only allocation—not only through broad emerging market (EM) exposure, but also through targeted country allocations based on their investment convictions?

To explore that question, we compared an all-US equity portfolio with some that incorporated broad EM exposure as well as one allocation scenario combining US equities with select Asian markets.

The results highlight that there is more than one way to diversify globally. Broad EM exposure can provide a diversified allocation across developing economies, while targeted country exposure can allow investors to emphasize markets where they see particularly compelling structural opportunities.

In our analysis, a portfolio consisting of 70% US equities and 10% each in South Korea, Taiwan and Japan generated nearly a 25% three-year annualized return and about a 15% five-year annualized return, compared with just over 19% and nearly 13%, respectively, for the all-US portfolio.¹

The point isn’t that investors should favor individual countries over broad EMs—or that these markets will outperform in every period. Broad EM exposure can remain an efficient way to participate across a diverse set of developing economies. But investors with specific convictions may also consider country allocations as a complement, adding exposure to economic and earnings drivers that may be underrepresented in their existing portfolios.

“International” and “emerging markets” are useful portfolio categories, but broad labels can obscure just how different the countries within them really are.

Taiwan is central to the global semiconductor supply chain. India is increasingly powered by domestic consumption, demographics and infrastructure investment. Brazil brings greater sensitivity to commodities and agriculture. South Korea combines semiconductors and artificial intelligence (AI) infrastructure with autos, shipbuilding and advanced manufacturing. Japan offers yet another mix, including advanced manufacturing, industrial automation and ongoing corporate reform.

These differences help explain why markets don’t always move in lockstep with US equities—or with one another.