Concentrate on concentration risk

Key takeaways

• Manage concentration risk: W1M avoids overreliance on a small number of large tech stocks through broader diversification.
• Look beyond passive investing: Index investing can increase exposure to concentrated markets and periods of weak real returns.
• Prioritise real returns: W1M targets long-term returns above inflation by investing in high-quality businesses with strong fundamentals.
• Diversification drives resilience: Combining equities with real assets and alternative strategies can help reduce risk and improve long-term outcomes.

Concentrate on concentration risk

The US “Magnificent 7” represents around 30% of the US equity market based on the market capitalisation of the companies; this is a relatively high level of “concentration risk” and is the result of very strong performance in certain technology stocks in the last few years. But,  the “Mag 7” has lagged the broader US market this year, showing that having index-weighted exposures is not always the best thing to do.

Some rotation away from the Magnificent 7 stocks is visible

Magnificent 7 % change from all-time high share price with NASDAQ Composite Index also shown​

Source: Bloomberg, W1M. As at 21.08.26​

W1M equity funds have meaningful exposure to AI-related stocks but we actively choose not to have as much exposure as indices based on the size (market cap) of companies. We have made a deliberate decision not to own NVIDIA, which alone represents around 5% of global equity indices; we have exposure to another chip designer, AMD, which has outperformed NVIDIA this year. We choose not to own Tesla but have Japanese exposure to automation and space technology. Our objective is not to mirror benchmark concentration because if a small number of stocks can move very differently to the broader market and drive indices sharply higher in some periods, they can also contribute disproportionately to declines in index levels.

Correlation between AI stocks and the rest of the market is negative​

Rolling 63-day correlation of Bloomberg US artificial intelligence enablers & adopters index and Bloomberg US500 index, January 2023 to current

Source: Bloomberg, W1M. As at 21.08.26​

W1M equity funds seek to maintain a diversified and resilient portfolio capable of weathering different market environments. While this approach may result in periods of underperformance relative to highly-concentrated benchmarks, it aims to provide greater downside protection during market corrections while still participating in rising markets. Over time, we believe this creates a better path to compounding returns, with a focus on delivering consistent real returns and outperforming inflation. In the end, compounding positive real-returns is what matters most savers and investors.

Why not just invest passively?

Firstly, passive investing means accepting the composition, concentration and volatility of an index. Investors may believe they are diversified by holding a large number of stocks but the performance of an index can be dominated by just a few stocks. Secondly, while passive investing has been highly successful in recent years, it can have lost decades. Following the dot-com bubble, investors endured almost a decade of poor US passive balanced fund returns before they meaningfully recovered. This has happened six times since 1900. Markets can go through extended periods where real returns are muted or even negative.

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.​

Our objectives

Our investment objectives are based on “real returns”. Rather than seeking to replicate an index, we focus on delivering consistent returns above inflation over the long term. To achieve this, we typically invest in between 40 and 50 carefully selected companies, each supported by a long-term investment case. We favour businesses with durable competitive advantages, attractive valuations, strong free cash flow generation, high or improving returns on capital, and management teams whose interests are aligned with shareholders. We invest with a three-to-five-year horizon or longer, focusing on company fundamentals rather than attempting to predict short-term macroeconomic developments. This allows us to maintain conviction through market cycles and avoid becoming overly reliant on the latest market trend. Importantly, we remain mindful of concentration risk. As investor capital crowds into a narrow group of AI beneficiaries, opportunities are emerging elsewhere in the market. Many attractive businesses in less fashionable sectors are trading at increasingly compelling valuations. We believe these areas offer substantial long-term value creation potential and provide important diversification benefits.

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​

Diversification matters

Concentration risk matters in equities currently but investors also need to think about inflation-resilience and returns which are not dependent on stock markets. Multi asset solutions seek to address these further questions: Real assets can increase the ability of portfolios to cope with inflation. Absolute return and protection strategies can help portfolios mitigate impacts in market volatility.  

Be efficient and properly diversified in portfolio construction ​

Conclusion

Genuinely active investment strategies can play an important role by diversifying away from concentrated equity indices, managing downside risks and identifying opportunities in overlooked areas of the market. For investors seeking consistent real-returns rather than index replication, active management remains a valuable complement to passive investing.

Glossary:

Concentration risk: The risk that a portfolio is overly dependent on a small number of investments, sectors, or companies. If those holdings perform poorly, the overall portfolio can be significantly affected.

Market capitalisation: The total value of a company's shares on the stock market. It is calculated by multiplying the share price by the number of shares outstanding and is often used to determine a company's size.

Passive investing: An investment approach that seeks to track the performance of a market index rather than actively selecting investments. Passive investors accept the composition and weightings of the index they are following.

Real returns: The investment return achieved after accounting for inflation. Real returns show how much an investment has increased in purchasing power, rather than just its nominal value.

Diversification: The practice of spreading investments across different asset classes, sectors, or companies to reduce risk. Diversification helps improve portfolio resilience and reduce reliance on any single investment.

Free cash flow: The cash a company generates after paying its operating expenses and capital expenditures. Strong free cash flow can indicate a company's ability to invest in growth, pay dividends, or withstand economic downturns.