In rising markets it’s important to be alert to risks and not blinded by returns, in particular currently, concentration risks, says Ian Rees, Head of Multi Manager Funds, Premier Miton Investors.
Advisers who take a client-centred approach to investment recommendations recognise that risk management, as well as investment returns, are necessary considerations in seeking to meet client investment objectives. With stock markets hitting all-time highs, it is sensible to remain alert to risks and not be blinded by returns in seeking to manage them.
One risk that has reappeared on our radar again is the concentration risk seen in the US market. While this has been flagged in recent years, we note this is at a time when our analysis shows that US allocations have been rising over the last year.
While there was a reversal of the US outperformance at the start of 2025, this proved a temporary setback. Following the ‘Liberation Day’ tariffs of early April, the US is back to its winning ways as risk appetite, evidenced by the strength in Bitcoin, surges once again.
Again, recent performance of the US market is dominated by the technology leaders following their positive results in recent weeks. We now see a situation where concentration risk is very notable, not just in the individual sizing of each name, but also in the size of their aggregation and in the concentration of theme driver. The largest ten positions in the S&P 500 Index have a record amount of index value. More worrying is the influence of the technology theme and sensitivity to Nvidia’s earnings amongst this cohort, with the largest seven stocks (Microsoft, Meta, Alphabet, Apple, Amazon, Broadcom and Nvidia) being over 30% of the index and tethered to a similar fortune. This situation makes us nervous as these stocks are so big they can equally have a big downward effect on the market.
We have seen throughout stock market history, repeated patterns of ‘winning stocks’ driving market returns, although these always come to a halt eventually as market leadership shifts. In every instance we have seen the turbulence this induces when the natural law of gravity (or in the case of companies: greater competition, emergence of competing technologies, regulatory constraints, or management failings – among the foremost catalysts) cause once high-flyers to lose their lustre. A lack of diversification will lead to errors, accidents or missteps being concentrated into greater volatility and larger drawdowns.
Having been a professional investor since 1999, and working through all market events since that time, my team has a natural belief in portfolio diversification. By delivering a smoother investment journey in absolute terms, clients are better able to stick with their investment plans in reaching their long-term goals. This sensible stance does come with challenge and difficulty. For one thing, a more diversified portfolio has the challenge of trying to keep pace with returns from an unhealthy concentration of momentum. Although evaluating returns on a risk adjusted basis helps rebase performance to a more comparable basis, too often the crude simplicity of ‘absolute’ performance can dominate.
Being diversified is a deliberate approach to reduce concentration risk within portfolios, particularly on the fear that following momentum blindly can easily shift into reverse. This requires discipline and an ability to withstand the pressure of FOMO (Fear of Missing Out). As we all too often see, the loudest clamour for a theme or investment idea, is at its peak.
So how to manage concentration risk, particularly prevalent in the US at the current time?
This can take a variety of forms. The simplest is through asset allocation with a reduction to the overall size of US equity exposure, especially where this entails a market-cap weighted approach. We recently undertook some analysis of all MPS models available in the Morningstar databas. Despite some commentary about greater US caution, the challenges to US exceptionalism, and the obvious concentration risk inherent in the market, we observed that contrary to our expectation, US exposure increased for the universe of MPS models between the summer of 2024 and 2025. We note that our allocation analysis did not go into the detail of what constituted the additional US allocations in MPS models, but we are concerned by the asset growth of S&P 500 Index ETFs that echo the same trend.
Regardless of a headline allocation, it is worth recognising that diversification can be achieved with the tool of investment selection. Switching an element of market cap weighted exposure to other cap profiles (say mid or small cap) or holding a contrasting investment style (such as having an allocation to ‘value’ stocks to counterbalance the ‘growth’ concentration at the mega-cap end), or even to consider alternative investment strategies such as a long/short fund, can all help in this regard. For our risk-targeted and growth funds, along with our blend MPS models, we employ all these approaches in our portfolios.
In summary, all investors, even professionals, should remind themselves not to expect immediate reward for employing diversification within a portfolio. It is only by chance that investment decisions align with the top and bottom of momentum cycles. However, identifying and managing to clear and present dangers with a discipline that emphasises the delivery of risk adjusted ‘absolute’ returns, will have a greater chance of keeping investors on-track and invested in meeting their financial goals. We have seen the benefits of this true active management approach through the bond-bust of 2022 and expect this time will not prove any different.
Important note
The views provided are those of the author at the time of writing and do not constitute advice. These views are subject to change and do not necessarily reflect the views of Premier Miton Investors. The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
