How We Invest: Public Equity

How We Invest: Public Equity
December 11, 2025 10 mins

How We Invest: Public Equity

Aon Portfolio Guide Public Equity

A guide to Aon’s views on public equity and portfolio construction advice for long-term success

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Nothing in this document should be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice.

Summary
  • The starting point for portfolio construction of any public equity portfolio should be a broad opportunity set representative of the global universe.
  • Aon uses a modified starting point for its portfolio construction. We have a strategic overweight to the US relative to the broad market when constructing portfolios.
  • Aon believes active management is best deployed in broader mandates. In these mandates, skilled investors have less constraints to adhere to when selecting attractive investments.
  • Portfolio construction is a key determinant of success, especially when using multiple active mandates within a public equity portfolio.
  • We believe that the best results for public equity investors are often achieved by those that maintain a long-term perspective.

Introduction

Public equity has historically offered investors strong absolute returns that are diversified relative to other asset classes.1 For investors that maintain an allocation to return seeking assets, equities will make up a subset of that portfolio. Aon maintains a number of beliefs on equity investing that are aimed at driving success. This piece looks at the variety of decisions that public equity investors face when constructing portfolios of public equity.

The public equity market is more efficient than other asset classes. For investors that choose to allocate assets with active strategies seeking a return above traditional indexes, that requires patience and a long-term mindset.

Getting started – How to build an Equity Portfolio

The starting point for a public equity portfolio is often the global universe. That is the opportunity set for institutional investors and is often represented by a broad benchmark such as the MSCI All Country World Index (ACWI) or MSCI All Country IMI Index2 (ACWI IMI), the latter having more representation in smaller capitalization securities. This universe includes companies domiciled in the US, developed non-US markets, and emerging markets countries. The indices will also include securities that represent broad market capitalizations.

Aon uses a modified starting point for its portfolio construction. We have a strategic overweight to the US relative to the broad market when constructing portfolios. This overweight is modest – 5% relative to the weight of the global index and corresponds to our belief that the equity markets in the US are stronger and will outperform non-US markets due to a variety of factors including monetary policy benefitting the equity markets, the broad make-up of the universe of public equity securities and the innovation and fundamentals of US-based companies. Additionally, there is less currency risk for US-based investors having a higher weighting in US- domiciled investments.

We believe that the best results for public equity investors are often achieved by those that maintain a long term perspective.

Active or Passive?

Once the benchmark has been determined for the public equity asset class, next comes implementation. Portfolios could be implemented using passive implementation, active management or a combination of both techniques.

Passive management is the replication of a market beta often represented as a traditional benchmark in a low-cost manner. We believe active management is a difficult endeavor given the efficiency of the asset class. As such, passive investment is a worthwhile tool and allows investors to achieve a market return at a low cost and a similar risk profile of the benchmark. This is an ideal solution for investors that are risk averse, fee averse, or choose to seek alpha in less efficient segments of the overall portfolio such as alternatives investments.

Active management, if successful, could offer investors a return in addition to the market beta by selecting favorable stocks through fundamental or quantitative investment approaches. Using active management takes patience and a long-term perspective as investment styles may be out of favor for extended periods of time. Aon believes active management is best deployed in broader mandates. In these mandates, skilled investors have less constraints to adhere to when selecting attractive investments. While we prefer active global equity mandates rather than blending separate mandates for each region, more flexibility is preferred even in more concentrated segments of the market. For example, in the non-US market, we recommend mandates that include developed and emerging markets, or mandates that include small and mid cap US stocks (Smid) versus just small cap and mid cap separately.

It is important to consider the construction of the active mandates. Concentrated portfolios will have fewer securities and will often have higher active share and tracking error relative to their stated benchmark. This type of portfolio typically consists of an asset manager’s best ideas. More diversified portfolios will still differ from the performance of the benchmark, yet the risk is spread across more securities. When analyzing diversified portfolios, we look to ensure that the portfolio is not overdiversified.

While investors may choose to solely implement with passive or active strategies within the public equity asset class, oftentimes we recommend a mixture of active and passive approaches to total equity portfolio construction. Having a mixture of strategies allows for the active risk to be taken where there is higher confidence of active management succeeding in segments of the portfolio like global or non-US equity. Having a portion of the portfolio in passive also allows for investors to lower the overall cost of the equity portfolio given the lower fees associated with passive investing.

Piecing it Together

Portfolio construction is a key determinant of success, especially when using multiple active mandates within an equity portfolio. Understanding how strategies are correlated and interact with each other will drive decisions made on weighting of each underlying strategy within the overall equity portfolio. Aon prefers a balanced portfolio across multiple factors, including contribution of risk by each strategy. If the portfolio is unbalanced, unknown risks may drive performance. When determining these risks, we look to determine if one strategy within the portfolio is contributing a greater amount of risk than preferred. That may drive the portfolio’s out or underperformance relative to a benchmark from just one strategy in a portfolio of multiple underlying investments.

Diversification3 of risk across managers is important in building a well-balanced portfolio. However, deploying assets to too many managers could have little diversification benefit. In broad markets, such as global equity, constructing a portfolio of three to five managers, depending on the asset size is prudent. In more efficient markets, such as the US equity market, diversification benefits quickly decrease when adding additional investment managers to the portfolio, particularly when paired with a passive investment.

Ultimately, Aon seeks to build portfolios that will outperform the market in a variety of market conditions. For this to exist, a portfolio needs to be balanced and employ strategies that are diversified from other mandates within the asset class. That will likely mean deploying capital to a mix of strategies that seek alpha in differing ways such as quantitative, flexible approaches, or fundamental approaches focused on a smaller subset of the broad equity universe.

Maintain a Long-Term Perspective

We believe that the best results for public equity investors are often achieved by those that maintain a long-term perspective.

Stocks trade daily and the price of a stock moves upwards or downwards on the constant changing of data. Some of these changes are warranted and others are likely irrelevant to the value of a business. But this dynamic causes volatility.

Because of short-term changes, active investing is not for short-term oriented investors. Having a diversified, well-constructed portfolio will help allow investors to benefit from differing styles. That also means all styles will not perform in tandem.

When evaluating performance, it is best to consider the performance of the asset class portfolio versus each underlying strategy. There will be times to move away from an active manager due to organizational concerns, investment team changes, or changes to its investment approach. Performance alone should not be a reason to terminate an investment strategy.

Aon’s Thought Leaders
  • Chris Riley
    Global Head of Equity Manager Research

1 Diversification does not ensure a profit nor does it protect against loss of principal. Diversification among investment options and asset classes may help to reduce overall volatility.
2 Past Performance is no guarantee of future results. Indices cannot be invested in directly. Unmanaged index returns assume reinvestment of any and all distributions and do not reflect our fees and expenses. Please refer to Appendix for Index Definitions and other General Disclosures.
3 Diversification does not ensure a profit nor does it protect against loss of principal. Diversification among investment options and asset classes may help to reduce overall volatility.

MSCI All Country World (ACWI) Index
A capitalization-weightedindex of stocks representing large- and mid-cap stocks across 23 Developed and 24 Emerging markets.

MSCI All Country World Index IMI
A capitalization-weightedindex of large, mid and small cap stocks representing 23 developed and 24 emerging market countries. The index is the broadest measure of the aggregate global stock market, covering approximately 99% of the global equity investment opportunity set.

General Disclaimer

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice. Investment advice and consulting services provided by Aon Investments USA Inc. (“AIUSA”). The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto. This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on AIUSA’s understanding of current laws and interpretation. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon AIUSA’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. AIUSA disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. AIUSA reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of AIUSA. Aon Investments USA Inc. is a federally registered investment advisor with the U.S. Securities and Exchange Commission. AIUSA is also registered with the Commodity Futures Trade Commission as a commodity pool operator and a commodity trading advisor and is a member of the National Futures Association. The AIUSA ADV Form Part 2A disclosure statement is available upon written request to: Aon Investments USA Inc. 200 E. Randolph Street Suite 600 Chicago, IL 60601 ATTN: Aon Investments USA Inc. Compliance Officer

Terms of Use

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