As global markets become more concentrated, investors may need to look beneath fund labels to understand what is really driving their portfolio risk.
This article was first published on Trustnet.
Owning a global equity fund – or several different funds – can feel like diversification. But beneath the labels, investors may be making much bigger bets on the same companies and themes than they realise.
You might own hundreds, perhaps thousands, of companies through your investment portfolio. On paper, that sounds reassuringly diversified. But look a little closer.
Five companies or six countries?
By the end of July, just five US companies (Nvidia, Apple, Alphabet, Microsoft and Amazon) accounted for approximately 18% of the whole global stock market as represented by the MSCI All Country index.
That is roughly the same weight in the index as every stock in Japan, Taiwan, the UK, Canada, China and South Korea combined!
Think about that. An investor buying a fund designed to track companies across the world could have as much riding on five businesses as they do on six major equity markets.
There is nothing inherently wrong with owning those companies. It’s their success that’s driven their growth. But it does raise an important question: are investors as diversified as they think they are?
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