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Wealth Insights | Equities | Investing101

Investing 101: Diversification Across The Equities Space

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Key Takeaways:

  1. Companies operating in different geographic locations, industrial sectors, or business areas as well as those of differing sizes all face a combination of the same and unique propellants and challenges.
  2. Investing in equities with a view to diversifying across these can lead to exposure to more areas of a broader market, and so a greater variety of return drivers, as well as spreading risks. Nevertheless, investors shouldn’t attempt to invest in every opportunity but instead should take a balanced approach to investing across a manageable number of investments that offer exposure to a diversified opportunity set.
  3. Ways in which exposure can be diversified across equity opportunities include:
    • Geographical: The economies of different countries may be at different stages of the economic cycle. They may also face unique risks and opportunities from sources including geopolitics and regulations.
    • Sectorial: Differing areas of the economy in the same country may face tailwinds or headwinds at any one time. Diversifying across sectors may help to spread risks as well as tapping into growing parts of the economy.
    • Thematic: Themes can offer a way to take advantage of structural changes and opportunities for long term growth. While themes may cut across sectors and geographies, not all themes will manifest in the same way or at the same time. They may also not take off as anticipated. Therefore, diversifying both with and across themes can be beneficial.
    • By Size: Smaller companies may be more agile and may have more concentrated exposure to certain opportunities than their larger peers. While this also exposes them to greater levels of risk, it may also offer a valuable diversification opportunity, compared to only taking exposure to larger companies.

​

What is Portfolio Diversification?

Diversification is the concept of taking exposure to a range of different assets both to seek different return drivers and to help reduce risks by limiting exposure to any one asset While often discussed in a cross asset class context, diversification may also offer benefits within asset classes. Within equities, some potential opportunities to diversify include:

  • Broadening geographic exposure
  • Exploring different sectors
  • Investing in themes
  • Considering companies of different sizes


Broader Geographic Exposure

Many investors have a natural bias towards investing in the equity market of their home country. While this can make sense due to greater knowledge of local economic and market conditions and potential currency risk when investing abroad, it may mean missing out on opportunities occurring elsewhere.

We see this spread of opportunities across countries reflected in the range of returns of the 47 country indices that make up the MSCI All Country World Index, as shown in the next chart. In each of the last 10 years, there were countries that experienced drawdowns as well as those that performed strongly.

This range of performances can reflect countries experiencing differing economic conditions at different times, varying sensitivity to changes in global demand, and country idiosyncratic shocks, among other factors.


Historical performance of MSCI ACWI Country Indices

Source: CPB Global Investment Lab, Bloomberg. Data from Jan 2014 to Sep 2024 for MSCI ACWI component country net total return indices. MSCI China data from Jan 2014. MSCI Saudi Arabia data from Jan 2019. Performance range reflects the range of performances within which all country index returns for that year fell. See glossary for more information. *2024 is YTD to Sep 2024.


Diversifying equity exposure across countries can potentially lead to higher risk adjusted returns. The next chart shows an example of this with historical risk adjusted returns (measured by Sharpe Ratio), for single country exposure (Germany) compared to regional equity exposure (Europe), compared to developed markets equity exposure, over the last 10 years.


Historical Sharpe Ratios

Source: CPB Global Investment Lab using Bloomberg. Data from Jan 2014 to Sep 2024 using MSCI net total return indices. See glossary for more information on indices used.


Explore Different Sectors

Within countries, different sectors of the economy may face different headwinds as well as differing drivers of returns at different times. Demand for the products and/or services of any one sector may not move in sync with the overall ups and downs of the domestic economy.

The chart below shows the range of performance for different industrial sectors in the United States for each of the last 10 years.


Historical Performance of S&P 500 Sectors

​Source: CPB Global Investment Lab using Bloomberg. Data Jan 2014 to Sep 2024 for the S&P 500 net total return sector indices. Data for the Real Estate sector from Jan 2017. See glossary for more information on indices used. *2024 is YTD to Sep 2024.


Different sectors also represent different proportions of different countries’ economies. For example, the S&P 500 index of US equities has a 29% weight to the Information Technology sector, compared to around 1% in the UK’s FTSE 100 index or in Brazil’s Ibovespa index1. In this way, an investment in a country may implicitly carry more, or less, exposure to any one industrial sector.


Invest In Themes

Investment themes aim to take exposure to specific business areas that may be beneficiaries of structural changes in the economy and potentially experience growth. For example, they may be as specific as “cybersecurity" or as broad as “aging demographics”, and typically encompass multiple areas of a value chain, cutting across traditional industrial sectors.

The example below illustrates how some themes have seen abnormal growth, but the adoption of themes can be rapid, hard to time, and they may also not take off as anticipated. As themes can offer exposure to sources of risk and return beyond geographies and industrial sectors, taking exposure to multiple different themes may be beneficial.
 

Historical performance of selected thematic indices vs their benchmarks

​Source: CPB Global Investment Lab, Bloomberg. Data Aug 1997 to Apr 1999, and from Jan 2016 to Dec 2021. Internet Commerce is the Dow Jones Internet Commerce Index. Global Semiconductors is the S&P Global Semiconductors Index. US Equities is the S&P 500 Index. Global Equities is the MSCI ACWI Index. Periods cover trough to peak performance of themes within a maximum 6 year window. US Internet Commerce series starts in Aug 1997. All indices reflect index price return only.


Companies Of Different Sizes

Smaller companies, as measured by market capitalization, tend to have different characteristics to companies of larger sizes, and can thus offer exposure to different risks as well as sources of return.

Smaller companies tend to be less established in their industries, and often sell a more concentrated range of goods or services in a smaller geographic area compared to their larger peers. This may result in their having greater sensitivity to changing economic conditions.

This increased sensitivity may be one reason why smaller companies have historically seen outperformance and higher volatility compared to their larger peers in the first year following a recession.


US Equities Performance Following US Recessions from 2001

​Source: CPB Global Investment Lab, Bloomberg. Data Jan 99 to Sep 24. Charts show 12-month gross return performance starting at the beginning of the first month following the end of each recession. Official recessions as classified by the National Bureau of Economic Research (NBER). 


In the US, small caps outperformed large caps in the year after 14 of 16 US recessions since 1926 (88% of the time)2. In Europe, small caps outperformed large caps in the year after 3 of the 4 Euro area recessions since inception of the bloc in January 19993.

While investing in smaller companies has historically come with increased levels of risk, their differentiated return drivers may increase diversification within a portfolio.


Conclusion

Companies operating in different geographic locations, industrial sectors, or business areas as well as those of differing sizes all face a combination of the same and unique propellants and challenges.

Investing in equities with a view to diversifying across these can lead to exposure to more areas of a broader market, and so a greater variety of return drivers, as well as spreading risks. Nevertheless, investors shouldn’t attempt to invest in every opportunity but instead should take a balanced approach to investing across a manageable number of investments that offer exposure to a diversified opportunity set.

 

1GICS Sector weights as at 8 October 2024.

2Source: Citi Wealth Investment Lab, Fama and French, NBER. Fama/French 3 Factors SMB data series, July 1926 to September 2024.

3Source: Citi Wealth Investment Lab, Bloomberg, OECD. Data from 1 Jan 1999 to 08 October 2024. Large cap outperformed small cap by 2% following the 2011-2013 Euro area recession.

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This document is for information purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities to any person in any jurisdiction. The information set out herein may be subject to updating, completion, revision, verification and amendment and such information may change materially.

Citigroup, its affiliates and any of the officers, directors, employees, representatives or agents shall not be held liable for any direct, indirect, incidental, special, or consequential damages, including loss of profits, arising out of the use of information contained herein, including through errors whether caused by negligence or otherwise.

CCIFL is not currently a member, and does not intend to become a member of the Mutual Fund Dealers Association of Canada (“MFDA”); consequently, clients of CCIFL will not have available to them investor protection benefits that would otherwise derive from membership of CCIFL in the MFDA, including coverage under any investor protection plan for clients of members of the MFDA.

Bahrain: IN BAHRAIN, CITI PRIVATE BANK OPERATES UNDER SPECIFIC APPROVAL ISSUED ON THE BASIS OF CITIBANK, N.A., BAHRAIN BRANCH’S BANKING LICENSE

Marketing and distribution of Investment Funds to clients in Bahrain requires Notification to the Central Bank of Bahrain and will be limited to UHNWI as defined below. Minimum investment subscription criteria will apply for products for all subscriptions for Bahrain domiciled clients.

Ultra-high net worth investors are:

(a) Individuals who have a minimum net worth (or joint net worth with their spouse) of USD 25 million or more

(b) Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than USD 25 million; or

(c) Governments, supranational organisations, central banks or other national monetary authorities, and state organisations whose main activity is to invest in financial instruments (such as state pension funds).

GLOBAL CONSUMER BANK (ASIA PACIFIC AND EMEA):

“Citi analysts” refer to investment professionals within Citi Research (“CR”), Citi Global Markets Inc. (“CGMI”), Citi Global Wealth Investments (“CGWI”) and voting members of the Citi Global Investment Committee.
Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document.

The information in this document has been obtained from reports issued by CGMI and CGWI. Such information is based on sources CGMI and CGWI believe to be reliable. CGMI and CGWI, however, do not guarantee its accuracy and it may
be incomplete or condensed. All opinions and estimates constitute CGMI and CGWI's judgment as of the date of the report and are subject to change without notice. This document is for general information purposes only and is not intended
as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. No part of this document may be reproduced in any manner without the written consent of Citibank N.A. Information in this document has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Investments are not deposits, are not obligations of, or guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware
of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance, prices can go up or down. Investment products are not available to US persons. Investors should be aware
that it is his/her responsibility to seek legal and/or tax advice regarding the legal and tax consequences of his/her investment transactions. If an investor changes residence, citizenship, nationality, or place of work, it is his/her responsibility
to understand how his/her investment transactions are affected by such change and comply with all applicable laws and regulations as and when such becomes applicable. Citibank does not provide legal and/or tax advice and is not responsible
for advising an investor on the laws pertaining to his/her transaction.

Citi Research (CR) is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

For more information, please refer to https://www.citivelocity.com/cvr/eppublic/citi_research_disclosures.

MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

Hong Kong: This communication is distributed in Hong Kong by Citibank (Hong Kong) Limited ("CHKL") and/or Citibank, N.A., Hong Kong Branch (“CBNA HK”, Citibank, N.A. is organized under the laws of U.S.A. with limited liability). CHKL and CBNA HK provide no independent research or analysis in the substance or preparation of this communication. Although information in this communication has been obtained from sources believed to be reliable, CHKL and CBNA HK do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use.

This communication is for general information only, is not intended as a recommendation or an offer or solicitation for the purchase or sale of any products or services and should not be relied upon as financial advice. The information herein
has not taken account of the objectives, financial situation or needs of any particular investor. Any person considering an investment should consider the suitability of the investment having regard to their objectives, financial situation and needs,
and should seek independent advice before making an investment decision. You should obtain and consider the relevant product terms and conditions and risk disclosure statement, and consider if it’s suitable for your objectives, financial situation or needs before making any investment decision. Investors are advised to obtain independent legal, financial and taxation advice prior to investing. Investments are not deposits, are not protected by the Deposit Protection Scheme in Hong Kong
and are subject to investment risk including the possible loss of the principal amount invested.

This communication does not constitute the distribution of any information in any jurisdiction in which it is unlawful to distribute such information to any person in such jurisdiction.

CHKL does not provide discretionary portfolio management services.

Singapore: This communication is distributed in Singapore by Citibank Singapore Limited (“CSL”) to selected Citigold/Citigold Private Clients. CSL provides no independent research or analysis of the substance or in preparation of this communication. Please contact your Citigold/Citigold Private Client Relationship Manager in CSL if you have any queries on or any matters arising from or in connection with this communication. Investment products are not insured under
the provisions of the Deposit Insurance and Policy Owners’ Protection Schemes Act of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme.

This communication is for general information only and should not be relied upon as financial advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person and is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Any person interested in the strategies or concepts mentioned herein should consult their independent tax, legal, financial or other advisors,
as appropriate. This communication does not constitute the distribution of any information or the making of any offer or solicitation by anyone in any jurisdiction in which such distribution or offer is not authorized or to any person to whom
it is unlawful to distribute such information or make any offer or solicitation.

Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making
an investment decision. Interested investors should seek the advice of their financial adviser about the issues discussed herein as appropriate. Should investors choose not to seek such advice, they should carefully consider the risks associated
with the investment and make a determination based upon the investor’s own particular circumstances, that the investment is consistent with the investor’s investment objectives and assess whether the investment product is suitable for
themselves. Although information in this document has been obtained from sources believed to be reliable, CSL does not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from Its use.

CSL does not provide discretionary portfolio management services.

UAE: This document is distributed in UAE by Citibank, N.A. UAE. Citibank N.A. UAE is licensed by UAE Securities and Commodities Authority (“SCA”) to undertake the financial activity as Promoter under license number 602003.

Citibank N.A. UAE is registered with Central Bank of UAE under license numbers BSD/504/83 for Al Wasl Branch Dubai, 13/184/2019 for Mall of the Emirates Branch Dubai, BSD/2819/9 for Sharjah Branch, and BSD/692/83 for Abu Dhabi Branch.

This is not an official statement of Citigroup Inc. and may not reflect all of your investments with or made through Citibank. For an accurate record of your accounts and transactions, please consult your official statement. Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making an investment decision. Each investor should carefully consider the risks associated with the investment and make a determination based upon the investor’s own particular circumstances, that the investment is consistent with the investor’s investment objectives.
At any time, Citigroup companies may compensate affiliates and their representatives for providing products and services to clients.

United Kingdom: This document is distributed in the U.K. by Citibank UK Limited and in Jersey by Citibank N.A., Jersey Branch.

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is a company limited by shares registered in England and Wales with registered address at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, Companies House Registration No. 11283101.

Citibank N.A., Jersey Branch is regulated by the Jersey Financial Services Commission. Citi International Personal Bank is registered in Jersey as a business name of Citibank N.A. The address of Citibank N.A., Jersey Branch is P.O. Box 104, 38 Esplanade, St Helier, Jersey JE4 8QB. Citibank N.A. is incorporated with limited liability in the USA. Head office: 399 Park Avenue, New York, NY 10043, USA.

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