What’s the evidence about diversification in your 'evidence-based' tracker?

Passive funds have a clear philosophy based on market capitalisation and replicating the performance of indices or benchmarks. This is sometimes called “evidence-based” and seems often thought of as highly diversified - maybe largely because a large number of securities are held. But, the evidence currently suggests a passive equity fund might be giving people very significant exposure to a small number of stocks.

Passive funds might have stock, sector and regional exposure determined by the market capitalisation of underlying stocks; this means that putting £100 into a US equity S&P 500 tracker fund leads to nearly a third of the money going into just seven “magnificent” large companies’ shares. That may not necessarily match the diversification intentions of investors. It may give savers much more exposure to a few technology stocks than they want. Here is the “evidence”:

Magnificent Seven around a record third of S&P500 Market Capitalisation

Magnificent Seven Index as % of Market Capitalisation of S&P500 Index 2016 - current, weekly

Source: Bloomberg, W1M. As at 08.08.25

If the equity exposure can be highly concentrated in a passive multi asset fund, is the bond exposure giving investors the diversification needed? A passive multi asset fund might have 60% of its holdings in global equity exposures determined by market capitalisations, and around 40% of it may be in bonds; this structure may also give less diversification than investors expect as around 70% of their money could be driven by 7 large stocks and bonds which are not always uncorrelated with bonds (stocks and bonds can go down together, as evidenced sharply in 2022). If, for example, inflation were to become more of a worry for markets and perhaps optimistic consensus expectations for US rate cuts in the next year changed radically, that could be negative for sentiment on both equities and bonds. If bonds and equities can be correlated and fall together, then being passive does not necessarily mean investors will automatically enjoy the diversification they might expect - especially when it is needed most in times of market stress.

Investing in Equities with W1M’s “global, active, direct” philosophy leads to portfolios which are not determined by market capitalisation but come from a fundamental research-led stock selection process which involves around 700 company meetings a year. If you look at the W1M* Strategic Equity Fund or Global Equity Fund, you will see not hundreds or thousands of stocks, but portfolios representing what W1M’s equities team has concluded are some of the best investment opportunities in global sectors. But, having fewer stocks than a passive tracker may not mean you are less well diversified given the current dominance in index trackers of a small number of stocks mentioned above; you could be better diversified by being deliberate in stock, sector, regional exposures chosen and build in potentially greater resilience to inflation, interest rate or growth shocks by not having a market cap weighted index fund.

The pie charts below show that W1M equity funds (Global, European and Asia Pacific) are certainly not clinging to any index but hold between 36 and 61 stocks.

The W1M Global Strategic Equity Fund has around 60 holdings (and is the equity building block in our MPS). The W1M Global Equity Fund has around 40 holdings and has different objectives to the Strategic Equity Fund (as set out here); they are not identical but share a bottom-up, index agnostic, direct, high conviction investment approach. This philosophy is common across all our equity strategies.

WSEF Positioning | Strategic Equity Fund (WSEF) 

WGEF Positioning W1M | Global Equity Fund (WGEF)

Sector positioning relative to MSCI ACWI | Strategic Equity Fund (WSEF)

Region positioning relative to MSCI ACWI

WECG Positioning | European Capital Growth Fund (WECG)

WAPF Positioning | Asia Pacific Fund (WAPF)

Source: W1M, Sept 2025

*W1M: It was announced in March 2025 that the London & Capital (“L&C”) and Waverton Investment Management (“Waverton”) brands would consolidate under new name “W1M” to offer clients one home for wealth and investment management. Waverton UCITS funds, however, have retained the Waverton name for the time being.