In an increasingly interconnected global economy, many US investors have maintained a domestic bias. This is a strategy that has paid significant dividends for many US focused investors over the last decade and a half, and arguably back to 1945. Despite investors facing a complex landscape shaped by market volatility, geopolitical shifts and domestic policy changes, the US market has continued, in general, to achieve one high after another. Eye watering price-to-earnings ratios have not seemed to perturb many US investors with the belief that nothing could derail the US markets. This bias can be understood given the historic performance of the US economy, strength and stability of the US dollar and the past political stability of the US government. However, succumbing to a home country bias has meant that many US investors have potentially missed out on some great investment opportunities, but more importantly, they have likely increased their concentration risk by not diversifying their asset base by currency and/or jurisdiction.
What does diversification look like? Modern Portfolio Theory (MPT) articulates that diversification may help investors mitigate the risk of investment loss, if allocations are made to asset classes with low or no correlations to one another. Statistically, correlation is measured from -1.0 to 1.0, meaning that assets with a correlation of 1.0 move in the same direction proportionally, whether up or down. Whereas a -1.0 correlation means that assets move in opposite directions proportionally. A correlation of zero means that the direction of two asset classes cannot be determined. In other words, if asset classes are negatively correlated, a down performance in one assets class would be offset by a positive performance in the other asset class. If assets are positively correlated, a positive performance in one asset class would result in positive performance of the other asset class. I can hear the question – so surely you want to construct a portfolio of positively correlated assets? If you pick one asset class that goes up, the others will go up, right? This has played out over the last 15 years within the US markets as cheap capital created by loose monetary policy has flocked to the safe haven of the US causing ‘all boats to rise’. However, as prudent risk managers, we are always looking for ways to mitigate the risk that clients must take in order to achieve their long-term goals and aspirations. As we have seen since the announcement that Donald Trump will be the 47th US President, the global stock markets have been through a wild ride; with US markets initially rallying hard on a pro-growth agenda, to a significant sell off in global markets on the back of ‘Liberation Day’, to (at the time of writing) a strong rally on the back of 90 day pause on tariffs. This volatility has highlighted the need for prudent risk management where the focus of investment management is not just on what can be achieved from a return perspective, but rather on the practice of understanding how families’ assets and liabilities are managed across currencies and jurisdictions.
While a domestic focus has historically delivered substantial returns, it can also constrain access to broader investment opportunities and increase concentration risk. Diversification—by strategically balancing asset classes with differing correlations—offers a way to mitigate these risks and harness opportunities beyond domestic borders. By blending assets across currencies, jurisdictions, and time horizons, investors can buffer against volatility, ensuring that downturns in one market are offset by gains in another.
Here at LGT Wealth Management US Ltd, we help families think through how to best allocate their risk across asset classes, jurisdictions, currencies, time horizons and how best to structure their liabilities. By constructing portfolios that incorporate offshore US exposure via Jersey and multi-currency diversification, we are able to provide strategies that are resilient, tax efficient from both a UK and US perspective and are designed to mitigate risk to weather market cycles. These portfolios come with all their necessary US tax reporting while remaining complaint with PFIC rules. This has recently added significant diversification benefit as we have seen the US dollar weaken and volatility hit the global equity markets.
LGT Wealth Management US Limited is a registered Company in England & Wales, registered number 06455240. Registered Office: 14 Cornhill, London EC3V 3NR. LGT Wealth Management US Limited is Authorised and Regulated by the UK Financial Conduct Authority and is a Registered Investment Adviser with the US Securities and Exchange Commission.
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