Is There Still a Case to Diversify Away From U.S. Equities?


  • Poor past performance seems to have dented the appeal of non-US developed or EAFE equities. High correlations have also seemingly reduced the benefit of diversification.
  • However, past performance, particularly once we allow for style and sector biases, is offering a poor rear view mirror to set regional equity allocations for today’s equity portfolios. EAFE allocations now are more likely to be portfolio enhancing, diversifying risk across sectors and reducing the risks from excessive home bias and recommend global market cap weights from a strategic perspective.
  • Valuation fundamentals favor EAFE equities over the US. Earnings have more potential to climb than in the US, though there are headwinds to both equity markets.
  • Though the US dollar may have some more near-term climbing to do, our longer-term view continues to see a tendency towards dollar weakness, rather than dollar strength. This is likely to be mildly helpful for non-US market returns.
  • Many US institutional equity portfolios, particularly corporate plans, are more US-centric today than they should be. A slow build of non-US allocations towards global market capitalization weights in the first instance seems to be a good first step.

Background and Scope

Most US investors have been gradually building up their allocations to non-US developed equities, commonly referred to as EAFE1 , over recent years but, as the table below shows, there are stark differences in the degree of home bias between plans by sponsor type and size. In particular, corporate plans tend to have allocated much less to non-US equities than public plans, as have smaller plans by asset size.

In this paper, we test the assumption that greater non-US exposure improves risk adjusted outcomes and highlight that performance differentials that have been in favor of the US in recent years, have seemingly weakened the case for diversification away from the US. We will highlight the challenges to diversification and provide our strategic view, as well as our medium term (1-3 year) view. This note will not cover the case for or against Emerging Market equities and focuses solely on developed world equities as this is where the focus of debate has been in recent years; our regular Medium Term Views updates provide information on emerging markets for those that are interested. 

To learn more about this topic, download the full whitepaper above. 

1 The acronym EAFE stands for Europe, Australasia and the Far East. The MSCI EAFE index covers all developed equity markets excluding the US and Canada. It is essentially the MSCI World index excluding North America.

About Aon

Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.


This document has been produced by Aon’s Global Asset Allocation (GAA) Research Team, a division of Aon plc and is appropriate solely for institutional investors. Nothing in this document should be treated as an authoritative statement of the law on any particular aspect or in any specific case. It should not be taken as financial advice and action should not be taken as a result of this document alone. Consultants will be pleased to answer questions on its contents but cannot give individual financial advice. Individuals are recommended to seek independent financial advice in respect of their own personal circumstances. The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto. The information contained herein is derived from proprietary and non-proprietary sources deemed by Aon to be reliable and are not necessarily all inclusive. Aon does not guarantee the accuracy or completeness of this information and cannot be held accountable for inaccurate data provided by third parties. Reliance upon information in this material is at the sole discretion of the reader.

This document does not constitute an offer of securities or solicitation of any kind and may not be treated as such, i) in any jurisdiction where such an offer or solicitation is against the law; ii) to anyone to whom it is unlawful to make such an offer or solicitation; or iii) if the person making the offer or solicitation is not qualified to do so. If you are unsure as to whether the investment products and services described within this document are suitable for you, we strongly recommend that you seek professional advice from a financial adviser registered in the jurisdiction in which you reside. We have not considered the suitability and/or appropriateness of any investment you may wish to make with us. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction, including the one in which you reside.

Aon Hewitt Limited is authorized and regulated by the Financial Conduct Authority. Registered in England & Wales No. 4396810. When distributed in the US, Aon Hewitt Investment Consulting, Inc. (“AHIC”) is a registered investment adviser with the Securities and Exchange Commission (“SEC”). AHIC is a wholly owned, indirect subsidiary of Aon plc. In Canada, Aon Hewitt Inc. and Aon Hewitt Investment Management Inc. (“AHIM”) are indirect subsidiaries of Aon plc, a public company trading on the NYSE. Investment advice to Canadian investors is provided through AHIM, a portfolio manager, investment fund manager and exempt market dealer registered under applicable Canadian securities laws. Regional distribution and contact information is provided below. 

Previous Video
Webinar: Retiree Lump Sum Windows Back on the Table - Navigating Risk Management Options
Webinar: Retiree Lump Sum Windows Back on the Table - Navigating Risk Management Options

Next Flipbook
CIO Newsletter [Q4 2018]
CIO Newsletter [Q4 2018]

Quarterly investment review and outlook


How May We Help? Reach out to an Aon consultant now.

First Name
Last Name
Job Title
Phone Number
Aon group companies will use your personal information to contact you from time to time about other products, services and events that we feel may be of interest to you.  All personal information is collected and used in accordance with our privacy statement.

Please click here to manage your communication preferences
Someone will be in contact shortly!
Error - something went wrong!