Navigating market concentration as sustainable investors

One of the defining features of equity markets over recent years has been extremely high levels of index concentration, with the so-called “Magnificent Seven” making up around a third of the total market capitalization of the S&P 500.

And while we have previously seen similar levels of concentration, never before have we seen such high correlation between the largest players – for instance, at present, eight of the top ten largest constituents of the S&P 500 represent a similar bet on the future of artificial intelligence (AI) and related technologies.

Of course, we remain very bullish on AI, yet the current situation, in terms of market concentration, means that portfolio managers would need to give away around 40% of their fund just to remain neutral on this theme. And, given our approach is very much a bottom-up one designed to generate returns across sectors, we do not want to relinquish our opportunities to generate alpha, wherever in our investable universe we believe this may come from.