Portfolio Construction

Over long periods equities have historically delivered higher total returns than bonds or cash, with most of that return coming from price growth tied to earnings growth; this makes them the main growth engine of a portfolio, at the cost of higher volatility.

Companies can partly pass higher costs through to prices, so nominal earnings and dividends tend to grow with inflation over long horizons. The caveat: in the short run, unexpected inflation often hurts equity prices, and the hedge varies widely by sector (e.g., stronger for firms with pricing power or real assets).

Because equities are imperfectly correlated with bonds and many alternatives, adding them can reduce total portfolio risk for a given return; correlations are not stable, however, and tend to rise toward 1 among risky assets during crises.

Clients may use equity holdings to express values or mission objectives, for example excluding certain industries (alcohol, weapons) or targeting ESG leaders; equities can also be held to meet specific liability or thematic goals set by the client.

Size segments use market capitalization (large, mid, small, micro cap); style segments separate value (low price multiples, higher yields) from growth (high expected earnings growth, higher multiples), with a blend/core category in between. The combination produces a size/style grid such as large-value or small-growth.

Moving from developed to emerging to frontier markets typically offers higher growth potential and diversification, but with lower liquidity, higher trading costs, weaker governance and investor protections, more currency and political risk, and index-inclusion constraints such as foreign ownership limits.