Recent market performance has once again highlighted the growing concentration within global equity markets, particularly in the US technology sector and companies associated with the artificial intelligence (AI) investment theme. Understandably, this has prompted questions from advisers and clients about portfolio positioning and how we are managing these risks within our Model Portfolio Service and Managed Funds.
The first point to make is that we recognise the concentration risk. A relatively small number of companies have been responsible for a significant proportion of global equity returns over the past 18 months[i]. However, we also recognise that many of these businesses are delivering exceptional earnings growth and generating substantial cash flows. Unlike previous speculative episodes, today’s market leadership is being supported by improving fundamentals – strong earnings growth, return on equity, and profit margins – as well as investor enthusiasm[ii].
Maintaining discipline
At Sarasin, our approach has been to participate in the opportunities created by AI while remaining disciplined on valuation and diversification. We have not ignored the wave, but neither have we simply chased it.
We remain underweight North America relative to global equity market indices and have consciously tilted portfolios towards quality businesses and companies with attractive dividend characteristics. This reflects our belief that long-term returns are best achieved through diversified exposure rather than highly concentrated bets.
One of the challenges facing active investors today is that momentum has become a dominant driver of market returns. In simple terms, the stocks that have performed best have continued to attract the most capital. As many of those stocks sit within the AI ecosystem, active managers can face a difficult balancing act between participating in the theme while also maintaining sensible diversification.
It is important to remember that portfolio management extends beyond stock selection alone. Tactical asset allocation remains a key tool within our investment process, allowing us to adjust overall portfolio risk as market conditions evolve. Currently, our assessment of economic growth, earnings trends and financial conditions actually remains supportive of equities and portfolios remain modestly overweight the asset class.
A wider toolkit
While we do remain constructive on the outlook, we are not complacent. We continue to monitor concentration risk closely and have the tools to react quickly. Within our multi-asset Managed Funds, we have purchased downside protection which is designed to improve portfolio resilience during periods of heightened volatility.
Importantly, this also highlights one of the advantages of the Managed Fund structure that sits at the heart of our MPS range. It provides access to a broader investment toolkit than is typically available within traditional MPS structures, allowing us to implement portfolio-level solutions such as derivatives-based risk management where we believe this can add value. While we are continually evaluating the most appropriate approach, this flexibility gives us additional options alongside more traditional tactical asset allocation when seeking to protect capital and manage risk through different market environments.
We are also continually reviewing our regional, sector and factor exposures to ensure portfolios remain appropriately balanced.
Positive signs
Our current view is that equities can continue to deliver attractive returns over the coming 12 months. Earnings revisions remain positive, economic growth remains broadly supportive and financial conditions continue to underpin risk assets.
The key message is that we have sought to strike a balance between participating in one of the most significant investment themes of the century while maintaining the diversification, valuation discipline and risk management that have always been central to our investment philosophy. As always, we remain vigilant and stand ready to adapt portfolios should the evidence change.
If you would like to discuss portfolio positioning or the current market environment in more detail, please do not hesitate to get in touch.
[i] https://am.gs.com/en-gb/advisors/insights/article/2026/exploring-investors-concerns-about-equity-market-concentration
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