Equities, concentration and tortoises

Key takeaways

• Global equity returns have become increasingly concentrated, with semiconductor and technology hardware companies driving a disproportionate share of market performance.
• Passive investors may have greater exposure to a small number of technology stocks than they realise, both in global and Asian equity indices.
• Diversification is not simply about owning more stocks or regions; it is about reducing reliance on a narrow set of companies, sectors or investment themes.
• Active portfolio construction can help mitigate concentration risk by focusing on valuation, fundamentals and long-term investment outcomes rather than index weightings.

Do you know the name of the largest Japanese company by market cap? It’s not Toyota or a megabank. Most people who have been in the markets for years won’t have heard of it. I didn’t get the right answer when our Japanese equities expert, Stefan Rheinwald, asked the question this week. At the end of 2024, Toshiba spun off its memory business into a standalone company called Kioxia Holdings and it currently has a market cap of around $275bn; it is up around 7,000% in 18 months driven by huge global demand for AI-related data-centres creating a severe supply shortage of NAND flash memory. This is just another sign of excitement in the technology sector and the seemingly singular focus of investors on the key beneficiaries of the enormous capital spending of the AI hyperscalers. With tech in the US and North Asia having done so well, would you buy at current levels? Are you still buying a lot of tech through index fund exposure? How diversified are your portfolios?

Global equities: Q2 saw the return of market concentration

Majority of the MSCI ACWI’s 14% advance driven by tech, especially the semiconductor & tech hardware stocks

1. Communication Services sector excl. GOOG + META
2. Consumer Discretionary sector excl. AMZN
3. Info Tech sector excl. Semi & Semi Equipment sub-group + Tech Hardware  + MSFT
4. Mag6 = GOOG, AMZN, META, AAPL, MSFT, NVDA (TSLA classified in Cons Disc)
5. Semis + Tech Hardware excl. AAPL + NVDA

Source: MSCI, Factset., W1M. 2026 Q1 and Q2 data

Concentration risk

In May, around 70% of global equity returns were driven by semiconductors and technology hardware; the figure is around 60% for the last 3 months. For perspective, these two industry groups account for 17% and 6.5% of the MSCI All Country World Index respectively and are classified within the wider Information Technology sector.  W1M portfolios have benefited from positions in stocks like TSMC (Taiwan Semiconductor), AMD, Samsung Electronics and Qualcomm, enabling our tech exposure to largely keep pace with the IT sector’s returns YTD despite being underweight the group versus the benchmark. This is not because we are “negative” on tech but more a reflection of our decision not to own index-heavyweights Nvidia and Apple, with a combined market cap of $9 trillion (9% of the global index). Indices do not guarantee a certain return and come with risks, not least those associated with the growing concentration within global and select regional indices we see today. Just as an index can be driven up by a small number of stocks, it can also be dragged down by a small number of stocks, highlighting the benefits of diversification within investment propositions.

Global Equities: Q2 returns dominated by technology

c.70% of the MSCI ACWI’s 14% return driven by US and Asian semiconductor and tech hardware stocks

Source: MSCI, Factset., W1M. 2026 Q2 data

Being active equity managers, W1M does not own index funds but creates portfolios with around 40-50 individual stocks, which we believe provides sufficient diversification for clients without taking on the concentration risks of the index. We chose not to own Nvidia, the semiconductor behemoth,  believing its industry-high gross margins will be under growing pressure as competition intensifies, preferring competitors like AMD which have outperformed it both this year and last (by some margin).  Should we have had more exposure to AMD and TSMC? That would have been good - with hindsight! But we did not need to own more to generate the kind of portfolio real returns we aim to deliver. We currently have exposure to US hyperscalers Microsoft, Alphabet (Google) and Amazon, as well as Tencent in China. We also have exposure to lesser known but excellent world-leading companies with strong long-term prospects like CATL (a Chinese company leading in advanced battery technology used in electric vehicles and energy storage systems), Keyence (a Japanese company and global leader in vision sensoring solutions used in factory automation, and a key beneficiary of physical multi-modal AI), and IHI (another Japanese company with leading propulsion technologies used in aerospace, defence and space equipment). So we are certainly not negative on technology but prefer to look for greater diversification across the value chain , focusing on those companies where we have the highest conviction in a fundamental outcome being achieved over 3 or more years. This leads us not to chase stocks which have been “hot” regardless of valuation, which can feel uncomfortable at times, but we believe not the way to compound superior risk-adjusted real returns over time.

Earnings

Earnings expectations justify market movements?

Most of the uplift to CY26 earnings estimates has been driven by semis, tech, hardware and oil stocks

Source: MSCI Factset, W1M. All in USD.

It can be argued that strong tech earnings justify dominance but stocks like Nvidia are not amongst the best performers year to date. The market seems aware that there is competition around and future earnings growth, obviously, cannot be guaranteed. Valuations matter ultimately.

Adding Asian or emerging market passive exposure is not necessarily diversifying away from technology

Asia has historically benefitted from broad industry diversification but, Ben Hall, who runs the W1M Waverton Asia Pacific Fund, has pointed out that now the Asian equity index is heavily centred on semi-conductors and technology hardware. The AI-related, hyperscaler capex cycle has meant that the industry’s longstanding allocation of c.20% of the index has risen to 47% of MSCI Asia ex Japan today. Risks come with around half the index being dominated by one sector.

Technology has become the dominant industry in Asia too

MSCI Asia ex Japan - allocation by sector

Source: MSCI, Factset., W1M as at end May 2026

As shown below, MSCI Korea is highly concentrated with SK Hynix and Samsung being dominant. TSMC obviously is a major part of the Taiwanese index but you can see how correlated MSCI Taiwan is with US semiconductor companies. This means that anyone thinking they are diversifying away from tech by adding Asia or EM may actually be increasing their bet on tech. As in our global equity funds, in Asia too we do not replicate an index and choose not to have a portfolio dominated by tech. This may look like giving up some upside in the short run but we believe it is the right way to invest for the long-term because, ultimately, valuations do matter and periods of strong earnings growth cannot necessarily be sustained, especially when high profit levels tends to attract more capital expenditure into sectors.

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: MSCI, Factset., W1M as at 16.6.26

Excitement about AI and semis can create opportunities elsewhere; the chart below shows that while Korea and Taiwan have received a lot of attention, other markets have become cheaper and therefore more attractive to the long-term investor. This creates opportunities to buy stocks which have been somewhat ignored despite strong free cash flow, real growth drivers and attractive valuations.  

Crowding into Semis also creates opportunities elsewhere

Source: MSCI, Factset., W1M as at 21.6.26

Passives do not always outperform

Investment propositions can find passive solutions very useful and cost efficient; we do not disagree but believe it is also important to diversify with genuinely active solutions because there are long periods when passive portfolios can go sideways. Those periods tend to come after very strong runs. At some point, markets have to be driven by real earnings and cashflow growth, not expectations. What can cause those periods? Recessions, inflation pushing up interest rates, exogenous shocks etc. When will it happen? That is what nobody can say. But we can say that blending solutions with similar underlying passive holdings may not be as beneficial in diversification terms as adding a different and active portfolio to the mix.

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.

What are your objectives?

Our objectives are based on beating inflation by delivering superior risk-adjusted real returns over an investment cycle. This makes us different to funds which aim to match an index and have to accept the volatility that comes with doing that. We have discussed the concentration risk in indices and pockets of high valuation in markets.  Having CPI+ targets means we can look like a steady tortoise, not a fast hare, in some periods because we are not trying to match an index. But, when corrections come, people then value the approach of the tortoise.  

CPI targets: Multi-asset W1M mandates

*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

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.

Why not just go passive? That would mean accepting index concentration and volatility; in any market weakness, that can be painful. As mentioned, we have seen index returns driven by a relatively small number of stocks this year and they can drive indices down as well as up; that is not just a US phenomenon. Are you deliberately choosing to take on more exposure to semis and technology in your portfolios to meet your objectives, or getting it because some tech stocks are now a very large proportion of their indices?

We are deliberately choosing to hold 40-50 stocks, each with its own 3 year or longer investment case, for which we are comfortable with the valuation, the durability of the company’s competitive advantage, its ability to generate future free cashflow growth, and that management is aligned  with shareholders. While making positive real (CPI+) returns, we can look like a tortoise if the (index) hare is running very fast in the shorter-term, but we remain committed to our long-term perspective, focused on the fundamentals, disciplined on price, looking to ignore short-term noise and avoid the risks of jumping on a momentum bandwagon. By better protecting to the downside and keeping close to markets on the upside, we are confident in our ability to deliver superior real-returns over an investment cycle.

Glossary

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.

Semiconductors:
Electronic components that power modern technology, from smartphones and data centres to artificial intelligence systems, and which have become a major driver of equity market returns.

Valuation:
A measure of what investors are willing to pay for a company relative to factors such as earnings, cash flow or assets, helping assess whether a stock appears attractively or expensively priced.

Diversification:
The practice of spreading investments across different companies, sectors, regions and asset classes to reduce risk and improve the resilience of a portfolio over time.