Financial advisers are increasingly focused on diversification amid growing concern that a small number of US technology stocks continue to account for a significant share of global equity market returns.
More than half (52%) of advisers believe multi-asset portfolios may be overly concentrated in US and large-cap technology equities, according to M&G’s latest Investor Compass report.
Analysis by M&G found a traditional 60% equities/40% bonds portfolio currently has its largest allocations in North America (59%), followed by Europe and the UK (18%), Asia ex Japan (4%), Japan (3%), China (2%) and India (1%).
In comparison, M&G’s PruFund Growth’s public market exposures has around 20% in the US, with investments spread across a broader range of regions and asset classes including the UK (28%), Europe (10%), Asia ex Japan (14%), Japan (4%), Africa (5%), China (4%) and India (2%).
M&G said the differences are also evident at company level. In a traditional 60/40 portfolio, the 10 largest holdings account for around 15% of equity exposure, while the top 10 holdings in PruFund Growth account for less than 5%, with no individual company representing more than 1% of total equity exposure.
The savings and investment group warned that greater concentration can also make investors more sensitive to market swings. Almost seven in 10 (69%) advisers say loss aversion is one of the most common behavioural biases they encounter among clients, while 41% say some clients continue to act against professional advice during periods of market volatility.
As advisers seek to build more resilient portfolios, diversification can help investors access opportunities beyond the world’s largest markets, says M&G.
Ciaran Mulligan, chief investment officer at M&G Life, said: “Recent years have reinforced the importance of diversification. Strong returns from a small number of companies and markets have increased concentration risk, leaving many investors more dependent on the US market and a handful of companies than they may realise.
“For advisers, the challenge is building portfolios with genuinely broader sources of return. This philosophy underpins PruFund, which provides exposure to globally diversified public investments alongside private markets in a single solution.”
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