10 Aug 2020 3 min read

Is US tech concentration a House of Cards?

By Joseph Firth

Exploring the unintended consequences of the concentration conundrum on diversification via global equity indices.


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We’ve previously discussed the concentration conundrum of US tech stocks. In this blog post, we want to develop this topic by exploring the unintended consequences this has on those seeking diversification via global equity indices.

The COVID-19 pandemic and the corresponding global lockdown led to the fastest bear market in history, with the S&P 500 index losing 30% in just 18 days of trading between late February and March.

However, as the world locked down and many businesses ground to a halt, the FAAANM (Facebook, Apple, Amazon, Alphabet, Netflix and Microsoft) stocks* were far less affected, as these companies benefitted from people around the world spending more time at home and having fewer options to socialise (for example, I watched Netflix’s The Last Dance twice in April!). This has meant that the outperformance of these securities has increased spectacularly. In terms of biggest contribution to return, Amazon won The Crown by adding an impressive 2% year-to-date to the S&P’s overall performance.

Orange is the new black


The FAAANM stocks were already the very largest in the index, so their continued outperformance relative to the rest of the market means that the weight of these six stocks in the S&P 500 is now over 25% for the first time in history. We still like tech, but over the longer term we are concerned by that concentration in so few stocks.

So what does it mean from a global perspective? The below chart is a visual representation of allocations within the MSCI ACWI, a global equity index. Investors often opt for a market capitalisation-weighted approach to equity allocation as it can be cost effective, transparent and appears to provide a broad exposure to countries, sectors and companies around the world.

However, the increased concentration in market-cap indices over time means that an investor now has more exposure to Amazon than to the smallest 25 countries within the index. In addition, despite the index covering 49 countries and nearly 3,000 individual stocks, one-fifth of its total investments now lies in just 20 US stocks, with the performance of Apple and Microsoft more important than the whole of the UK and German equity market!

We believe that this is a concentration conundrum for investors and being exposed to so much idiosyncratic risk is undesirable. Therefore, we opt for broader diversification relative to a market-cap weighted approach and reduce exposure to the largest region, sector and stocks.

Some of the ways that we’ve done this are by taking a more balanced approach to regional equity allocation, and by reducing the US whilst increasing exposure to other regions such as emerging markets. With regards to sectors, we spread our exposure more evenly into more defensive equity sectors like infrastructure and forestry; from a stock perspective, we’ve introduced artificial intelligence into portfolios to express our positive view on tech, whilst diversifying away from the biggest US technology stocks.

There’s no doubt that our more diversified approach has not always paid off due to the unbelievable performance of the FAAANM stocks. But these companies do face significant risks, and the recent grilling of the company chief executive officers by the US Congress about their potentially anticompetitive practices was a good example of this. Whilst the outcome didn’t move share prices, it is a reminder that techlash (restrictive regulation of the largest US tech firms) would be a real challenge to the unquestionable optimism that’s currently priced into these stocks.

While we acknowledge that the environment for tech is likely to stay positive for now, could these six stocks underperform to the same extent that they’ve outperformed in recent years? Stranger Things have happened.


*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

Five-year performance of the S&P 500 index versus the S&P 500 index excluding the information technology and telecommunication services sectors

  S&P 500 Index TR S&P 500 Index Ex Information Technology & Telecommunication Services TR
2015 1.40% 0.20%
2016 12.00% 11.10%
2017 21.80% 18.00%
2018 -4.40% -5.80%
2019 31.50% 25.90%

Joseph Firth

Investment Specialist

Joe is an investment specialist across Asset Allocation but also covers Factor-Based Investing funds, so he loves anything big picture and anything rules-based, though the state of his desk would suggest otherwise…. As the only member of the team with a beard, this may be the reason people liken him to Vincent Van Gogh and everyone thinks he’s far older (and hopefully wiser) than he actually is(!) Since moving to London, Joe has been spreading the word that his home county of Derbyshire isn’t that bad. So far this message has fallen on deaf ears, with team members opting to holiday in other comparable destinations such as Barbados and Nicaragua.

Joseph Firth