Global equities: Why diversification matters

After a decade of US mega-cap dominance, international diversification is making a comeback. CHRIS LEES sees new opportunities emerging

• Global diversification is working again
• Opportunities shifting beyond US mega‑caps
• Learn more about the Pendal Global Select Fund

NEW opportunities are emerging across geographies, sectors, and styles — particularly in financials, communication services, and select Japanese names.

That’s the message from Chris Lees, who co-manages Pendal’s Global Select Fund.

“We believe strongly that international diversification is working again and that active selection by geography, sector, and stock characteristics matters more now than it has in years,” says Lees.

A turning point for international diversification

“There is growing evidence that we’ve moved past the long bear market in international diversification.

“More specifically, the US is no longer the only game in town. While large-cap growth stocks remain in the lead, many of the strongest ex-US performance trends are showing up in small- and mid-cap value.

“It’s a decoupling that we haven’t seen before — and one that has direct implications for our stock selection.”

Lees believes this divergence reflects more than just differences in sector make-up. It suggests that the macro landscape itself is evolving in new ways.

As a result, the portfolio is now largely focused on three distinct opportunity sets: the Americas, Europe, and Asia. Each has its own catalysts and risks and each, crucially, has new leaders emerging.

Money talks: Financials and communication services

Lees says current sector positioning in the portfolio favours financials and communication services, driven by a mix of improving fundamentals, attractive valuations, and a deliberate effort to avoid crowded trades.

Financials are back on the radar, not as legacy value plays, but as under-appreciated beneficiaries of structural change.

“We see the regulatory drag that has weighed on banks post-2008 beginning to lift, particularly in Europe,” says Lees.

That’s opened the door for credit growth to once again flow through the banking system. In regions where economic stimulus is likely to come via government spending (rather than equity markets), banks are natural intermediaries and therefore stand to benefit.

Communication services, meanwhile, offer a mix of idiosyncratic growth and low correlation to broader macro forces. These tend to be businesses whose earnings and share prices are less dependent on the economic cycle.

Big in Japan

“Some of our team’s strongest conviction ideas are in Japan,” says Lees.

Part of this stems from the normalisation of interest rates and an ongoing wave of corporate governance reform.

But, according to Lees, the deeper story is that Japan is producing genuinely unique stock-level opportunities — companies that are, in a sense, not really correlated to Japan.

“Our positioning in the region will continue to reflect a willingness to embrace these dislocations,” notes Lees.

“Recent holdings include Japanese industrials exposed to global defence trends, as well as domestic names benefitting from structural change in capital markets. Amidst the potential for a post-election policy wobble, we see volatility as a potential entry point, not a reason to step back.”

Planned obsolescence

In high-conviction active portfolios, what’s left out is just as deliberate as what’s included.

Lees says classic quality-growth names like ASML, Novo Nordisk, and LVMH, stalwarts of the last cycle, are notably absent from the portfolio.

“It’s not a reflection of business quality, but of market dynamics: in our view, these stocks have likely seen the strongest phase of their price appreciation, at least for now,” he says.

“We believe we’re moving on from what was a very narrow market to a broader market of new growth stocks in new sectors and new regions.

“This is reflected in our rising name count and a willingness to go off benchmark when justified.”

Not defensive, not aggressive — selective

Lees says rather than pick a side on the offensive versus defensive spectrum, the preference is to emphasise a third way: opportunistic patience.

“We expect more volatility ahead — not the kind that marks a bear market, but the kind that creates temporary dislocations in a still-constructive environment,” explains Lees.

“In our view, the best approach to what we’re calling a ‘volatile bull market’ is to be patient, wait for opportunities, and look for early birthday presents.

“Rather than chase rallies or sit on the sidelines, we are actively engaged, with the flexibility to take advantage of dislocations and the discipline to act when the opportunity is right.”

Broader opportunities require broader thinking

The investment team is positioning the portfolio for a more dynamic market environment, one that’s introducing new leaders across geographies and factors: European banks with earnings momentum, Japanese companies once dismissed as cyclical, and under-followed names in financials and comms services that can deliver true diversification.

“In a world that’s increasingly multipolar — economically and politically — we believe this kind of broad, active, and conviction-driven approach is well-suited to the moment,” says Lees.

About Chris Lees and Pendal Global Select Fund

Chris Lees co-manages Pendal Global Select Fund with Nudgem Richyal. The pair have been working together in global equities investing for more than 20 years.

Chris has more than 35 years of industry experience. He joined Pendal Group’s UK-based asset manager J O Hambro Capital management (JOHCM) in 2008. Before JOHCM Chris headed up Baring Asset Management’s Global Sector team. He spent 19 years at Baring.

Find out more about Pendal Global Select Fund