Asset Allocation Research for UK Advisers

by Henry Cobbe CFA, Head of Research, Elston Consulting

When we read the financial news, much of the commentary is around what is impacting different sectors.  A commodities rally is good for Materials sector.  Higher interest rates are bad for the Real Estate sector.  Consumer Staples fare better during recessions.  Rising oil prices is positive for the Energy sector.  And of course valuations being stretched in the Technology sector.  And so on.  Yet when it comes to asset allocation, financial advisers and discretionary investment managers are anchored into countries/regions and try to get a look-through sector perspective as an afterthought.  This is paradoxical.

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?

Are equity markets in an AI bubble? Is AI a bubble? These questions crop up everywhere – from client meetings to magazine covers – and reflect a broad sense of unease. When people ask about “bubble trouble,” what they really want to know is whether markets have become dangerously detached from reality. Here’s how we at Elston think about it: what the data shows, what history suggests, and – crucially – what we’re actually doing in portfolios.

The adoption of AI tools is accelerating rapidly.

Which companies are the winners and which are the losers from the AI revolution?

by Hoshang Daroga CFA, Investment Director, Elston Consulting

Is the AI boom starting to look like a bubble?

Equities have recovered strongly from the tariff shock earlier in the year. Dollar weakness vs Sterling has weighed on the relative performance of US equities; however, this was a step-change and there are concerns for Sterling too.  Gold has continued to perform very strongly on the “debasement trade” and Central Bank buying.  Within Bonds, Emerging Markets are in better shape than Developed Markets, in our view.

Read more to watch Understanding Factor Investing with Henry Cobbe, CFA and Andrew Ang, PhD.

Elston Consulting has launched the Elston World Equity Factor Equal Weight Index (ticker ELSFEW).
​
The index represents an equal weight allocation to six London-listed world equity factor-enhanced ETFs from BlackRock’s iShares:including world equity exposures for six different factors: Value, Quality, Size, Momentum, Minimum Volatility and Yield.
The index is available for research purposes and also for potential fund manufacturing by asset managers looking to enter the systematic investing space as a half-way house between traditional active and traditional (market-cap) passive.
An active factor allocation strategy is one of the fund innovations featured on Elston’s Research & Development Wish List, the firm writes.
The fund format is more readily accessible than ETFs to the approximately GBP900 billion AUM platform-based UK IFA market – a fact lost on many US-based ETF issuers who have been waiting over a decade for ETF connectivity on UK platforms to be resolved to unlock that market.  Elston was an early pioneer of “fund of ETFs” to resolve this, with its first fund-of-ETFs launched in 2020.
The new factor index is a sibling index to the Elston World Equity Sector Equal Weight Index launched in 2022 (ticker ELSWES) which was built with London-listed sector ETFs from SPDR.  This sector equal weight index is used as a benchmark for an active sector allocation fund launched by Foster Denovo in 2023 and managed by State Street Global Advisers.
Henry Cobbe, Founder & Head of Research at Elston Consulting, says: “Many UK advisers are aware of the Fama-French three factor model, and see that as a so-called “evidence-based approach”.  The reality is that there are more discernible factors beyond the Fama-French model alone.  So, if advisers are looking at the evidence, they need to consider all the evidence.  Whilst some factors like Value may show strong performance over the very long run, the performance gap between best (Momentum) and worst (Value) factors over the last five and 10 year performance has been huge.  Active factor selection, and “tilting” to prevailing market regimes is key.  A buy and hold approach is really unhelpful if you’ve “set and forget” the wrong factor for a decade or so.”
Hoshang Daroga, Investment Director at Elston Consulting, says: “The concentration issues for traditional world equity indices are well documented.  We see active factor and sector selection as having a key role to play in tilting portfolios to different styles and exposures in different market regimes, and for style diversification purposes.
The challenge is how to evaluate those factor and sector selections given market-cap weighted indices have high concentrations and a resulting inherent bias.  We built the World Equity Factor and Sector Equal Weight indices to help asset allocators evaluate to what extent their active factor or sector selections have added value against a simple equal weight approach.”
Scott Adams, Head of Adviser Relations at Elston Consulting, says: “Elston was one of the early pioneers of index-of-ETFs in 2014 and fund-of-ETFs in 2020.  A rules-based systematic index-of-ETFs helps asset allocators readily evaluate strategies in real time via their preferred data vendor or analytics provider.”

Read the article in ETF Stream

Parallels are drawn between the mid-1990s tech revolution and today's AI-driven surge in the US equity market. While valuations appear stretched, the underlying conditions are more measured than the dot com era. The US economy continues to show resilience with AI-led productivity gains and potential rate cuts shaping the outlook.

Medium-term concerns remain on US growth and equities valuations. Any US recession would likely be global. Near term downside risks to the economy are greater in Europe and the UK.

The article argues for a tactical shift out of bonds into UK equity income for multi-asset portfolio

We discuss the rationale for being overweight US Equities given the resilient economy and strong earnings growth outlook.  But one manager's overweight can be another manager's underweight: it depends on your benchmark and how you define "Neutral."

Whilst there are main global equity indices, there is no daily priced Global 500 index with funds tracking it.  A Global 500 index is a more manageable universe for asset owners wanting an “Index-Targeted Exclusions Enabled” Separately Managed Account.

We explore the outlook for regional equities, bonds, currencies, and alternative assets.

We look at the latest data from the SPIVA® Europe scorecard and key findings.  UK Small Caps are one of the few bright spots.

In this article we explore the origins of a systematic UK Equity Income strategy now powered by Elston’s Minerva™.

UK equities are a helpful value-factor proxy.  Value-based investing is a persistent driver of returns over time.  But not all the time.  We explore UK equities’ embedded factor tilt and how it can help diversification.

The UK equity market has underperformed the US and Global Equity over the long-term.  How much should UK investors allocate to it?

Transatlantic security is going through a reset.  Europe needs to shift to hard power to guarantee its own security.

Trump’s chaotic tariff policy is destabilising markets and raising concerns around impact on US economic growth and inflation.