Developed equity market allocations in Multi-Asset portfolios

In this article, we look at the attributes of developed market (DM) equities and consider the pros and cons of holding a DM equity allocation as part of a multi-asset portfolio.

DM equity funds are often a key component of diversified multi-asset portfolios. We have previously considered the benefits and opportunities within emerging markets (EM) but what about the case for equities in more developed economies?

While DM equity strategies come with an abundance of different features, in general they are invested in businesses across well-established economies, with deeper and more mature capital markets, including the UK, US, Germany, France, Japan, Singapore and Australia. After their most recent reviews, FTSE Russell had 25 developed markets and MSCI has 23 in its equivalent category, with differences over the treatment of South Korea and Poland, for example.

Index providers look for a range of factors to decide if a market is developed, which can include:

• Solid level of economic development
  This is determined by measures such as gross national income or gross domestic product (GDP) per capita, which should broadly match other DMs and show a level of consistency, with attainment over several successive years. Having these facets should bring a high level of industrialisation and strong infrastructure to support business and trade. However, some high GDP per capita countries can be excluded because of income inequality, with a low standard of living for too great a proportion of the population. Qatar, for example, has a relatively robust GDP per capita that is higher than that of Australia or Sweden, but is excluded from DM indices because of domestic income inequality¹, along with other issues that include liquidity and other investability limits used by some index providers.
• Robust legal and regulatory frameworks
  These are there to help provide safeguards for investors and give them confidence to invest their capital in the market. Shareholders should have rights that are respected and upheld. There should be solid, high-quality disclosures that generate trust in information in financial reports and prospectuses. Information provision should also be timely and provided in English to help international shareholders.
• Investment infrastructure
  Mechanisms to facilitate trading in and holding of investments, including solid settlement and clearing arrangements, and custodian banks, are among the common requirements. Capital markets need to have depth to allow for a broader array of strategies, that include stock lending and short selling.
• Market liquidity and size
  There typically needs to be a sufficient level of actively traded stocks, often with a market capitalisation and free-float threshold imposed by an index provider. Free float is the shares that are available for general ownership and trading, often stated as a percentage of the overall number of shares in a company. Sometimes this can be lower in less-developed markets because of high ownership by the state, a founding family, or the government might restrict the trade to foreign owners. This will give a minimum level of trading volume or trading value, so that investors can easily trade into and out of the market. FTSE Russell requires the DM’s overall size to be the equivalent of at least 5 basis points of the Developed All Cap Index, across at least five stocks, which, as an example, would have equated to an investable market cap of over US$46 billion as at the end of 2025².
• Foreign ownership permitted
  DMs should have a high proportion of the stock market available for foreign shareholders to own, allowing capital to flow easily into and out of the market. This should include onshore and offshore foreign exchange markets for the relevant DM currency.

DMs should have a high proportion of the stock market available for foreign shareholders to own

Diversification – As ever, with a mix of assets, the addition of other asset classes such as DM equities can help with diversification. In this case, this is because a DM fund has different market dynamics to EM equities, bonds, and alternative investments, which can reduce overall volatility and improve risk-adjusted returns.

Robust potential capital growth – While growth is generally not expected to be as strong as EM, the risks of investing in a developed market fund tend to be lower. There can still be strong economic growth in developed markets due to movements in the economic cycle, or expansion in certain sectors, like technology. It can also vary by market capitalisation, with smaller-cap stocks generally exhibiting faster growth. However, in recent years, large pockets of developed markets have seen strong growth, including US mega-cap stocks, such as NVIDIA.

Lower operational risks – Given more robust regulation and market transparency.

Market resilience – Developed markets have tended to be less volatile during periods of market shock or economic downturns. They can also recover relatively more quickly than EM.

Political stability – Which can be backed by sound fiscal and monetary policy frameworks, and relatively low currency volatility.

Economic cycles – As with any equity holdings, DMs are subject to the vagaries of global economic cycles, which can hit equity performance.

Slower economic growth – DM growth is usually outpaced by EM growth, though the growth pattern is usually more volatile in the latter.

Policy actions – Even with high governance levels, there can be changes in regulatory regimes or certain policy actions that can cause volatility or uncertainty in specific companies, sectors, or across the whole economy. For example, the introduction of a new tax regime.

Sector skews – In the past, sector diversity was a strength of DMs as a group. They tended to have a better spread of equity market exposure, with more sectors represented in significant size. This is still the case in many countries within the DM index, but overall, there is currently a heavy skew to technology, driven by the US. EMs by comparison can often see heavy biases to basic materials, financials or technology hardware