Whose neutral is it anyway?

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."

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Is it right to be overweight US equities?

We are comfortable with our overweight to US Equities, based on a resilient economy, strong earnings growth outlook, and the Dollar weakness vs Sterling in 1h25 broadly played out, in our view.

But when discussing "overweight," overweight relative to what? That depends on your strategic asset allocation "neutral," which may also depend on what benchmark you are using.

What does neutral mean?

Tactical asset allocation discussions are incomplete without defining a strategic "neutral"

For tactical allocation positions, it's always important to ask if an asset class is "overweight" or "underweight," then relative to what?

Neutral can mean different things to different people.  In our ecosystem "neutral" assumes a 20% UK equity home bias (as per our Multi-Asset Indices for GBP investors below).  This 20% was chosen as it is the approximate mid-point between no-UK-bias managers and high (~40%) UK bias manager

A tale of three benchmarks

Manager A uses a Global Equity benchmark adjusted for a 20% home bias, so a neutral US allocation is 52%.  A 10ppt overwieght by manager A against that benchmark would be a 62% allocation to the US.

Manager B uses a Global Equity benchmark with no home bias, so a neutral US allocation is 65%.  A 10ppt overweight by manager B against that benchmark would be a 75% allocation to the US.

Manager C uses a World Equity benchmark (developed markets only) with no home bias, so a neutral US allocation is 72%. A 10ppt overweight by manager C against that benchmark would be a 82% allocation to the US,

So in a discussion around asset allocation positioning, discussion of overweight or underweights can get confusing if benchmarks are not defined.  Let's say managers A, B and C decided on a 62% allocation to US equities.  For manager A, that represents an overweight, for manager B that's a neutral, for manager C that's an underweight.

Whilst overweight and underweight are useful indicators of directionality, without defining terms as to what neutral looks like, it is impossible to evaluate quantum.

So whose neutral is it anyway? That depends on their strategic asset allocation and their selected benchmark.
And whose position makes most sense?  Only time will tell... but without defining terms you could have three managers identically allocated with very different opinions as to why.

Watch the debate

In any case, Hoshang's explanation seemed to attract some curiosity from another manager - you can watch the video here.  But if you've got different benchmarks, you might as well talk at cross purposes!

We always like a bit of UK as a useful diversifier - but the outlook for earnings growth remains squarely in the US.  With massiving pressure on the Dollar from institutional hedging in 1h25 now played out, we expect a return to the fundamentals of earnings growth. Find out more in our latest Market Outlook.

For more on how to size a UK allocation within your home bias, see our article from March 2025
https://www.elstonsolutions.co.uk/insights/sizing-the-uk-home-bias-in-your-equity-allocation