Investors plan how much money to allocate to each equity region in different ways. Some look at GDP growth for each region, but that seems to be less useful – unless you can spot recessions coming up, such as the recent problems in China.
I would not, myself, hope to get these economic forecasts right all that often.
Some allocate their equities according to the valuations of each region, but as often noted, the high valuation of the US market mainly reflects the concentration of technology leaders and the low valuation of European markets reflects the numbers of banks.
Using ESG factors to set regional allocations for a global equity portfolio comes up with a very different mix.
An ESG method might conclude that you want to be fully weighted in US equities – for the shareholder focus of management and the free-market activism – and then select stocks that are on more modest valuations than the Magnificent Seven.
You might then take an overweight allocation to Japan – on the basis that the ESG scores are low, but are rapidly improving.
It is hard to see how these factors would suggest high weightings in Europe or emerging markets.
Of course, in recent years this ESG allocation would have performed quite well, and maybe better than the average allocation typical of global equity funds at the moment.
Simon Edelsten is a former professional fund manager
