Active investing & Blue Turtles

Key takeaways

• Global equity returns have become increasingly concentrated, with AI-related, semiconductor and technology companies dominating market performance.
• Savers and investors may have greater exposure to technology stocks than they intend - both in US, global and Asian equity indices.
• Past market cycles show that passive strategies do not always outperform and periods of strong index returns can be followed by extended periods of weak real returns.
• Consistently delivering real-returns is key for meeting long-term objectives.

In Sting’s album, The Dream of the Blue Turtles, he has a song entitled “Consider Me Gone” which suggests the search for perfection is futile; active equity managers favouring “quality” factors, such as strong balance sheets, superior profitability, consistent earnings growth and cashflow generation, and facing increasingly concentrated global equity markets, driven by AI-related stocks, may sympathise with the sentiment. A lot of active management has “gone” and been replaced even within many active solutions by passive exposures to equity regions. Why not just go passive?

AI-related stocks driving market performance since the launch of ChatGPT

Performance of AI and non-AI segments vs MSCI ACWI %

Definitions: *AI capex beneficiaries include companies for which a significant proportion of revenues is derived from datacentre build-out, and where this expenditure is a key driver of share price performance. This group includes semiconductor and semiconductor equipment companies, as well as a selection of industrial and technology hardware businesses that are direct beneficiaries. **Total AI also includes the hyperscalers, Chinese internet and cloud platforms, and a selection of software companies directly involved in AI.

Source: MSCI, Factset, W1M. As at 30 June 2026

Markets have been narrow, concentrated and dominated by technology stocks for quite a while. High expectations of future earnings growth have driven stock prices and been encouraged by evidence of some delivery in that regard. Index funds based on market capitalisation weights have benefited massively from momentum in some sectors and subsectors. Active equity managers designing a well-diversified equity portfolio with strong cash flows and sustainable earnings growth are likely to perform well in the long run, but the human “search for perfection” is often, perhaps, a shorter-term activity.

The chart below shows that over a third of the MSCI ACWI global equity index is now in AI-related stocks. Today, the largest component within this are the AI capex beneficiaries (shown in dark green), which include the semiconductor and semiconductor equipment companies that now represent just over 20% of the global index, from c.5% prior to the launch of ChatGPT in late 2022. The W1M Waverton Strategic Equity Fund’s exposure to this latter group has been below those levels primarily because of a deliberate decision not to own the index heavyweight, NVIDIA, which in isolation accounts for around 5% of the global benchmark today. It also reflects our decision to own only one of the three largest “memory” stocks (Samsung) that were the key drivers of the most recent momentum rally. This has not helped performance, we know, but it has not been an error. We have significant exposure to AI-related stocks but we do not want the portfolio to be dominated by the technology sector; if an index can be driven up sharply in the short-term by relatively few stocks, it can also fall sharply if those stocks correct. We look to maintain a diversified and resilient portfolio over the business cycle; this is our chosen stance even if it means we can make a positive absolute return but lag the index in the shorter-term. Our approach seeks to better protect client capital in a market drawdown, while keeping close to markets on the upside, enabling us to compound superior returns ahead of the index over the long term and to beat CPI inflation by an average 4.5% a year; that is to deliver a consistent real return.

Over a third of  global equities (MSCI ACWI index) is now in AI-related stocks, with 20% in direct hyperscaler capex beneficiaries

Source: MSCI, Factset, W1M. As at 30 June 2026.

Why not just have passive exposure?

Firstly investing passively does not always and everywhere outperform. What has worked in the last few years will not necessarily work in the next few years. The chart below shows that there can be “lost decades” when, after doing very well for a long time, real returns can be negative for a long time in indices. Post the dot-com crash, it took around 9 years for US 60-40s to start making gains again.

Passive 60/40 portfolios have endured 6 "lost decades" since 1900; could we be entering no. 7?

Source: BofA, Bloomberg. As at 31.12.25.  Note: 60/40 = 60% S&P 500 real total return and 40% US 10-year bond real total return

Risk warning: Past performance is no guarantee of future results.

Secondly, passively investing means choosing to accept the volatility and concentration risk in the index. The US “Magnificent Seven” is around 30% of the S&P500 index and have been a negative drag on that index this year. Diversifying by adding passive Asian and Emerging Market exposure is not necessarily as diversifying as people may expect. The charts below show that the Taiwanese index closely tracks US semiconductor stocks because of the dominance of TSMC in MSCI Taiwan and that in Korea, just two stocks represent around 2/3 of the MSCI Korea market. Are you deliberately choosing to have the exposures you have to AI-related stocks in passive funds? If there is a correction, are you happy to accept the volatility which could result?

High levels of Index concentration create the illusion of diversification

These markets now represent highly concentrated bets on the semi-conductor cycle, creating the illusion of diversification for passive and closet-tracker portfolios.

Source: W1M as at 23.07.26

What are your objectives?

Our objectives are based on delivering consistent, real returns. This makes us different, and complementary, to funds which aim to match an index and have to accept the volatility that comes with doing that.

CPI targets: Multi-asset W1M mandates

Reference £ index:
Equities: MSCI AC World Index
Fixed Income: ICE BofA UK Gilt Index | ICE BofA Sterling Corporate Index
Alternatives: S&P Real Assets Index (Hedged) | Absolute Return Index**
Cash: ICE GBP SONIA 1 Month.

*Given the unprecedented interest rate and monetary policy environment, the range of outcomes is likely to be high.

**Absolute Return Index: 66.6% HFRX Global Hedge Fund Index, 33.3% ICE BofA 1-3 Year UK Broad Market Index

We deliberately choose to hold 40-50 stocks, each investment with its own 3-5+ year investment case. We choose those where we have high conviction in their ability to deliver a fundamental outcome over a long-term investment horizon, irrespective of the macro backdrop. These are companies with which we are comfortable regarding their valuations, the durability of their competitive positions, their ability to deliver free cashflow growth and to sustain high/improve returns on capital, and where management are aligned with shareholders. We are concerned about “concentration risk” and market indices being driven by momentum behind a relatively small number of stocks. Crowding into AI-related stocks creates interesting investment opportunities in “out of fashion” parts of the market, however, making shares which we think are very attractive in the long run even more compelling in valuation terms, offering the potential for significant value creation.

Crowding into Semis creates opportunities elsewhere

Source: W1M, MSCI as at 23.07.26

Conclusion

Passive strategies can appear invincible, but history suggests they can have lost decades. Perfection is impossible to find in portfolios, but complementary strategies, which are genuinely active, may be useful in diversifying away from indices with high levels of concentration risk currently.

Glossary

Concentration risk: The risk that portfolio performance becomes overly dependent on a small number of companies, sectors or investment themes, increasing potential volatility if those holdings decline.

Passive investing: An investment approach that seeks to replicate the performance of a market index by holding securities in proportion to their index weightings, typically at a lower cost than active management.

Quality investing: An investment style focused on companies with strong balance sheets, sustainable earnings growth, durable competitive advantages and effective management teams.

Real return: The return generated by an investment after accounting for inflation, providing a measure of the growth in purchasing power.