11 Aug 2026
With geopolitical uncertainty elevated and global equity markets concentrated around technology and AI, equity income can play a valuable defensive role in investor portfolios today. Portfolio manager Tristan Purcell outlines the attributes we look for in companies in order to construct portfolios with the potential to provide resilience during turbulent times, while also capturing equity market upside.
Global equity markets are currently highly concentrated around the US, and in particular big tech. The US now makes up 67% of the global index, despite accounting for only 25% of global GDP.
Passive investment strategies have delivered decent returns through this period of high concentration. But investing in the index today means taking a significant bet on one pocket of the market. Indeed, history shows us that putting all your eggs in one basket can lead to poor outcomes when concentration unwinds.
Back in the 1980s, for example, Japan was very much the market of choice for equity investors, growing to 45% of the global equity market at its peak despite making up just 20% of global GDP. That concentration subsequently unwound, hurting investors with a heavy allocation to Japanese equities when its index weight fell to just 5%.
We don’t have a prediction that the US will soon follow Japan’s historic precedent, but the future is always uncertain and against today’s narrow market backdrop, our global equity income portfolios offer more diversified exposures outside of the US and technology.
AI enthusiasm is currently a significant driver of today’s concentration in big tech, with market leadership narrowing around AI, semiconductor and memory stocks. Against this backdrop, it is worth bearing in mind that as investors we can lose money in two ways.
By company fundamentals deteriorating, or by overpaying for companies and multiples contracting, even if the fundamentals remain intact. In today’s AI-led market, there is a risk that, even if fundamentals hold up and hyperscalers keep spending, valuation multiples nonetheless become too high and a large sentiment shock sends share prices falling - similarly to the volatility we witnessed across AI stocks at the end of July.
The impact of such drawdowns can be significant for long-term investors. Drawdowns destroy the power of compounding returns, as large losses require higher gains to recover - a 50% loss requires a 100% gain to get back to breakeven. Deeper drawdowns also increase the likelihood of poorly timed sales, whereas a smoother path of returns means investors are more likely to stay invested over time, therefore continuing to benefit from the power of compounding.
With this in mind, we design our global equity income portfolios with the aim of limiting drawdowns versus the broader global equity market. We do this by building defensiveness from the bottom up, rather than making large top-down allocations to defensive sectors such as staples, utilities or pharmaceuticals.
The problem with indiscriminately allocating to these sectors is that it can still leave investors exposed to significant losses if an area is affected by political or other shocks. Indeed, we have seen this play out in recent years with pharmaceuticals companies, which have been hit hard by a combination of tariffs and political pressure in the US.
Instead, we aim to create portfolios that are defensive at the individual company level, primarily through our stock picking. We carry out due diligence on companies’ risks and opportunities through the lenses of business model, valuation and financials. Low volatility isn’t an input to this equation, but rather an outcome of the process.
Our two largest sector weights are in industrials and financials, which on the face of it do not offer typical defensive investment opportunities. But some of these defensive characteristics can be seen by taking a closer look at our holdings within the sectors. For example, we own high-quality transport infrastructure operators. We also hold financial exchanges, which often benefit during times of volatility as people tend to trade more assets.
We also own several insurance stocks. We tend to avoid life insurance companies, which are more sensitive to bond yields, instead opting for areas that are less economically sensitive. For example, we hold several car insurance providers with earnings that are driven by accident frequency and repair costs, rather than the macroeconomic environment. Similarly, we own reinsurance companies, which are more impacted by hurricanes and other extreme weather events than the broader economy.
This approach is enhanced by portfolio construction. We aim to take relatively larger positions in stocks that have lower expected downside risk, and relatively smaller positions in stocks where there is slightly more downside risk, but a higher expected rate of return.
Our focus on company-level defensive characteristics leads to portfolios that are deliberately diversified across a variety of business models, sectors and regions. From a geographical perspective, we tend to have relatively low exposure to companies listed in the US compared with the wider market, but retain balanced economic exposure since many of our non-US listed holdings are global leaders and naturally make sales in the world’s largest economy.
Many of the largest US technology names would not be eligible for our portfolios because their future cashflows are too uncertain, often tied to products or services that may take years to fully materialise. This wide range of potential outcomes makes it difficult to ascertain fair value, and introduces risks that we aim to mitigate, rather than pursue. Furthermore, most big tech companies do not meet our requirements around paying dividends - a crucial element of our investment criteria as equity income investors.
In this context, it is important to recognise that dividends provide a reliable building block of total return across the cycle and offer welcome visibility at a time of market uncertainty. Ultimately, the return from dividends has never been negative, and this element of total return is more predictable than the more volatile earnings and valuations components. A dividend discipline also aligns with resilient, cash generative, well-governed businesses that are typically best equipped to weather macro challenges.
Global equity markets are increasingly concentrated around the US and big tech, with narrow AI-led market leadership presenting growing risks for investors. However, we believe that a global equity income approach centred around a diversified portfolio of sustainable, dividend-paying businesses is well placed to provide resilience, take advantage of overlooked opportunities and drive attractive total returns.