for the great rotation, dispersion is your friend

The US equity market dominates market-cap weighted indices.  A market-cap weighted approach results in a concentration in the tech sector.  Whilst this has helped US equity performance historically, it has held it back - in relative terms in 2025.  So where should investors allocate if they wish to diversify away from the US?

A Great Rotation

by Henry Cobbe CFA, Head of Research, Elston Consulting

We have seen a “great rotation” across equity market exposures to seek out better valued investment opportunities.
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Index-style rotation: within US equities, we have seen US market-cap based allocations rotate to US equal-weight allocations.  The S&P 500 Equal Weight index means each company has 0.2% weight in the index.  This creates an index closer aligned to Main Street, than Wall Street or indeed Silicon Valley.
Regional rotation: We have also seen asset flows rotate from US equities into rest of world equities as investors look to diversify away from the US.

Focus on dispersion

When considering how and where to allocate, a key metric is dispersion.  The greater the dispersion within an equity market exposure, the greater the potential for positive alpha (if you get it right!).
Below shows the level of dispersion across investable equity market exposures for 2025, all in GBP terms, ranked by magnitude of dispersion.

• UK Equity Segment dispersion: Within UK Equity segments (which we break down to UK Large Cap, UK Mid Cap, UK Small Cap and UK Equity Income), the level of dispersion was very high. In 2025, the differential between the best performing UK equity segment: (UK Equity Income +48.9%) and the worse performing UK Equity segment (UK Mid Cap +12.4%) was 36.5% creating substantial opportunity for alpha through active allocation within UK Equity segments.
• Factor dispersion: Within world equities, we also look at a factor-based approach.  In 2025, the differential between the best performing factor (Value +30.7%) and the worse performing factor (Minimum Volatility +3.4%) was 27.3% creating substantial opportunity for alpha through active factor allocation.  For a sector-neutral benchmark, consider the Elston World Equity Factor Equal Weight Index.
• Regional equity market dispersion: In 2025, the differential between the best performing region: Asia ex-Japan (+30.8%) and the worse performing region: US (+9.4%) was 21.4% creating substantial opportunity for alpha through active region allocation.
• Sector dispersion: Within world equities, we also look at a sector-based approach.  In 2025, the differential between the best performing sector (Financials +20.0%) and the worse performing sector (Real Estate +2.7%) was 17.3% creating opportunity for alpha through active sector allocation. For a sector-neutral benchmark, consider the Elston World Equity Sector Equal Weight Index.

Why is equity market dispersion important

Dispersion within equity markets – whether within regions, within regional equity market segments, within sectors or within factors – creates potential for alpha for those fund managers that are willing to exploit it.  Dispersion is in fact, the active manager’s best friend.  In this respect, rotation creates an opportunity: to capture it requires both discipline and agility.