Rethinking Diversification Amid Economic Fragmentation: Why Revenue Geography Matters More Than Ever

The fragmentation of the global economy is disrupting traditional portfolio diversification strategies. Historically, asset managers allocated capital by region based on company domicile, reflecting economic activity within national borders. Today, this method misrepresents true exposures.

In an environment marked by monetary policy divergence, regional instability, supply chain challenges, and de-globalization, a company’s location or listing no longer reliably indicates where its risks and returns originate. A U.S.-listed semiconductor firm generating most of its sales in East Asia, for instance, is inherently exposed to a different set of economic, political, and currency dynamics than its domicile suggests.

Yet traditional portfolio construction often overlooks this distinction. The result is a disconnect between perceived and actual exposures, introducing unintended concentrations and limiting the effectiveness of diversification or hedging strategies.

This paper evaluates the strategic importance of revenue geography in portfolio design, drawing on FactSet’s GeoRev dataset to offer a more accurate view of where companies are economically exposed. We demonstrate how a revenue-based lens enhances diversification, increases sensitivity to market regimes, and results in portfolios better aligned with today’s volatile, multipolar investment landscape.

The belief that investing across listing domiciles achieves geographic diversification is increasingly disconnected from economic reality. Many large-cap companies generate most of their earnings outside their home country. When systemic shocks occur—via foreign exchange volatility, trade friction, or diverging central bank policies—these overseas revenue linkages act as transmission mechanisms. Yet they remain underrepresented in most risk models and allocation strategies.

The growing academic literature supports this thesis. Multiple studies have found that a company’s revenue geography offers stronger explanatory power for stock performance than its listing domicile, particularly during periods of macroeconomic stress. This insight reframes geographic revenue exposure not as a secondary input, but as a standalone factor with material impact on return behavior.

The Solactive 2019 paper proposed a methodology using the Herfindahl-Hirschman Index (HHI) to measure geographic revenue concentration. HHI, long used by regulators to assess market concentration in antitrust contexts, is calculated by summing the squares of a company’s revenue shares across different geographies. Higher HHI values indicate greater revenue concentration in fewer markets, while lower values signal diversified international exposure. Though the HHI framework has appeared in studies on banking sector risk in Colombia or Turkey’s export dependency, its application to firm-level geographic revenue segmentation remains limited in both academic and industry practice.

In our study, we build upon the Solactive framework using FactSet GeoRev data. We adjust the methodology by selecting a broader index of approximately 1,500 developed-market equities using our proprietary global equity universe. The index applies free float, and liquidity filters and uses primary listing country to define base domicile.

From this universe, we construct two portfolios: one with companies that exhibit low geographic revenue concentration (low HHI, representing globally diversified firms), and one with companies whose revenue is heavily concentrated in their home market (high HHI, representing domestically exposed firms). Both portfolios are market-cap-weighted and sector-neutral and are rebalanced quarterly.

Our backtest period spans February 2006 to November 2024. The results align with and extend Solactive’s original findings: major macro events such as Brexit, the U.S.-China trade war, COVID-19, and recent inflation-fueled tightening cycles produced significant divergence in portfolio performance. In particular, the divergence between high-HHI and low-HHI portfolios has grown more pronounced in recent years, especially from 2018 through 2024, suggesting that the interaction between macro regimes and revenue geography has become more acute.

Exhibit 1: Concentrated vs. Diversified Portfolio Performance, 2018-2024

Drilling into the data, we observe distinct regime phases.

• In 2018, the concentrated portfolio outperformed during the U.S.-China trade war, when tariffs disrupted global trade and a rising U.S. dollar amplified foreign exchange pressures.

• In 2019 and early 2020, as the Federal Reserve shifted to a more accommodative stance and began cutting rates, the diversified portfolio outperformed, benefiting from improved liquidity conditions and renewed investor appetite for globally exposed assets.

• From early to mid-2020, markets experienced a sharp volatility spike and collapse in global trade, followed by a swift rebound in both exports and equity performance as policy responses took effect. This recovery phase, beginning in April 2020, saw volatility steadily decline and diversified portfolios regain strength amid improving global activity.

• Between July 2020 and late 2022, concentrated portfolios again outperformed, bolstered by domestic resilience amid inflation shocks and a hawkish Fed.

• Briefly in early 2023, diversified portfolios regained leadership, before falling behind once more as risk aversion returned and geopolitical fragmentation intensified.

The cyclical shifts in portfolio performance reflect the emergence of a distinct market environment increasingly observed alongside traditional bull and bear phases: bifurcation. In these regimes, domestically focused and globally exposed companies diverge meaningfully in performance. This dynamic typically surfaces when macro conditions such as a stronger U.S. dollar, falling trade volumes, heightened volatility, and reduced global liquidity begin to strain firms with international revenue exposure. As Longin and Solnik (Journal of Finance, 2001) highlight, equity correlations tend to rise during periods of market stress, compressing diversification benefits precisely when they are most needed.

To quantify and track bifurcation regimes, we explored four key macro indicators: the CBOE Volatility Index (VIX), the Federal Reserve’s Broad Trade-Weighted Dollar Index (DTWEXBGS), the World Export Value Index (seasonally adjusted), and the GDP-Based Recession Indicator Index (JHGDPBRINDX), developed by the St. Louis Fed using Hamilton’s Markov-switching model. This latter indicator, while retrospective, is widely used to validate regime shifts and confirm macro inflection points.

Overlaying these indicators across our study period reveals distinct regime transitions.

Exhibit 2: Exploring Bifurcation Regimes Triggers, 2018-2024

• In 2018, a confluence of trade protectionism, Fed rate hikes, and U.S. dollar strength triggered a bifurcation phase. Tariffs on Chinese imports, combined with retaliatory measures and a rising dollar, pressured global revenue firms. Concentrated portfolios outperformed given exposure to more domestically focused companies.

• In 2019, the Fed reversed course amid slowing global growth and launched a series of rate cuts, including emergency liquidity injections via the repo market in September that year. This dovish pivot triggered a re-expansionary regime, benefiting diversified portfolios.

• The pandemic-induced volatility spike in March 2020 marked a sharp but brief bifurcation event. The VIX surged to 82.69, exports collapsed, and the U.S. dollar spiked; all conditions that disproportionately impacted global firms.

• By mid-2020, recovery was underway, and both trade and sentiment improved. However, the inflation shock of 2021 and the aggressive rate hikes of 2022 triggered another bifurcation regime. The Fed’s hikes from 0.25% to 4.00% over the course of the tightening cycle coupled with a sharply rising dollar created FX headwinds and funding stress for global earners.

• A brief recovery in early 2023 saw the diversified portfolio outperform again, supported by softer inflation prints and dollar weakness. But this phase was short-lived.

• From April 2023 through November 2024, the market experienced renewed fragmentation, driven by geopolitical stress, renewed volatility (including a near-record VIX spike in August 2024), and ongoing U.S. dollar strength.

 The findings align with supporting literature.

• Bollerslev, Todorov, and Xu (2015) show that in periods of stress, volatility spikes compress correlation structures, reducing diversification.

• Danielsson, Valenzuela, and Zer (2018) demonstrate that global firms are more vulnerable during liquidity droughts.

• The Bank for International Settlements (2025, Working Paper No. 1266) confirms that FX movements materially affect corporate profitability, with exporters particularly exposed.

• Mammen, Alessandri, and Weiss (2021) argue that while product diversification reduces firm-level risk, geographic diversification raises exposure during geopolitical shocks and FX volatility.

• Research on U.S. multinationals finds that episodes of dollar strength typically depress valuations and earnings for firms with significant foreign revenue exposure, while domestically focused companies tend to hold up better and often outperform in strong-USD, risk-off environments (International Review of Financial Analysis, 2017).

• Industry evidence adds further weight. For example, MSCI’s Market Liquidity Monitor shows that deteriorating liquidity conditions often coincide with regime shifts where defensive, domestic revenue models hold up better.

Taken together, this literature reinforces a clear point: revenue geography isn’t a theoretical concept as it has direct, practical consequences for portfolio performance. The patterns we observe in our HHI-based portfolios reflect this. Companies with globally distributed revenues tend to benefit when macro conditions support cross-border growth—stable currencies, healthy trade volumes, accommodative policy, and low volatility—but often lead the downside during periods of geopolitical stress, financial tightening, and disrupted global flows.

It’s important to stress that bifurcation regimes can emerge in both bull and bear markets. A rising dollar or policy shock can trigger global/domestic performance divergence even when indices are grinding higher. Conversely, in bear markets, global firms may suffer disproportionately as liquidity stress amplifies cross-border vulnerabilities.

The implications extend beyond performance. Geographic revenue segmentation improves risk attribution, allowing managers to distinguish between country, sector, and factor contributions more clearly. It enhances scenario analysis, enabling stress testing based on real economic exposure, not simply listing country. And it opens the door to more precise benchmark construction, model portfolios, and tailored client solutions.

In a world where globalization can no longer be taken for granted, and where structural macro divergence appears increasingly permanent, understanding where companies earn their revenue has become a foundational input for asset managers. Revenue geography is not a secondary variable. It is an essential lens through which to view risk, return, and resilience.

Russell Smith, FactSet Regional Sales Director, performed the backtesting for this analysis.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.