For some time, we have stressed the importance of diversification in equity markets, and these predictions have begun to materialise in meaningful ways. The extreme concentration in US markets, combined with historic valuation levels, means that on a risk-reward basis, equity return opportunities now clearly favour diversification and active management.
Understanding market concentration
The persistent dominance of the US financial market has led to a very small number of companies dominating equity returns over the last decade, creating extreme levels of concentration, valuation and profitability – Goldman Sachs recently estimated all three metrics to be in the 97th percentile or higher compared with the last 100 years of data.
This concentration has significant implications for future returns. David Kostin at Goldman Sachs concluded in late 2024 that returns in the next 10 years in the US equity market are likely to be significantly lower than the previous decade – as low as 3% per annum. The implications are stark: £1,000 invested in the S&P 500 over the last ten years grew to £3,395, at a 13% growth rate. With only a 3% return for the next 10 years, investors would generate just £345 of profit. If this proves accurate, index investing, particularly in the US, won't be the only way forward.
The scale of concentration is at historic extremes. The 10 largest companies in the S&P now represent over 40% of that index, a historic high. While "Magnificent 7" company earnings have been growing strongly, investing in the S&P index now carries a high degree of stock-specific and theme-specific risk.
Does it matter that so much of the market value is held amongst a small number of names? I would say yes for two reasons. First, it makes the S&P index less representative of the broader economy. Second, large companies don't necessarily remain large forever. Data since 1950 shows only seven companies have held a position in the top three in the S&P for five consecutive years or more. Leadership is never permanent. From General Motors to GE to Apple, each era crowns a champion. The risk lies in assuming today's champions are untouchable.
The valuation risk in passive investing
US markets are at their most expensive valuation since 1929 – way ahead of the dot-com boom period. Profitability, measured by return on equity for the S&P, stands at 21%, the highest in 100 years.
Over half the mutual fund market is now invested in passive, index tracking funds. The critical issue is that passive investing pays no attention to valuation. Passive funds don't make judgements about whether a company is cheap or expensive – they simply buy every stock in an index in proportion to its size. This means the only thing that drives their buying and selling is money flowing in or out of the fund, not whether valuations look attractive.
With US valuations at historically extreme levels and $9.7 trillion in ETFs globally, over half in US large cap, passive investors are highly exposed to valuation risk in today's market.
Opportunities for diversification
Performance through the first three quarters of 2025 reveals significant opportunities beyond US markets. While the Magnificent 7 returned 17.6% and the S&P 13.2%, China gained 43% in dollars, the Eurostoxx rose 24.9%, and the Topix in Japan climbed 12.7%. Gold has been a standout performer, with gold miners proving particularly attractive for balancing opportunity and risk diversification. These varied drivers of return highlight the clear benefits of broadening exposure across regions, sectors and asset classes.
The case for diversified, active portfolios
After more than 25 years of managing money, these extremes in market concentration are unprecedented. The opportunities to diversify and create carefully curated portfolios are remarkable. The sheer size of disruptive change, magnified and concentrated in fewer names because of passive money flows, will catalyse diversification and benefit active investors.
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The Funds managed by the Global Equities Team:
- May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
- May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
- May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares.
- May have a concentrated portfolio, i.e. hold a limited number of investments or have significant sector or factor exposures. If one of these investments or sectors / factors fall in value this can have a greater impact on the Fund's value than if it held a larger number of investments across a more diversified portfolio.
- May invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of a fund over the short term.
Certain countries have a higher risk of the imposition of financial and economic sanctions on them which may have a significant economic impact on any company operating, or based, in these countries and their ability to trade as normal. Any such sanctions may cause the value of the investments in the fund to fall significantly and may result in liquidity issues which could prevent the fund from meeting redemptions. - May invest in companies predominantly in a single country which maybe subject to greater political, social and economic risks which could result in greater volatility than investments in more broadly diversified funds.
- May hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay.
- May, in certain circumstances, invest in derivatives but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead.
The risks detailed above are reflective of the full range of Funds managed by the Global Equities Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID."
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
DISCLAIMER
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
Mark Hawtin
Mark Hawtin is head of the Global Equities team. Mark joined Liontrust in 2024 from GAM, where he was an Investment Director running global long-only and long/short funds investing in the disruptive growth & technology sectors. Before joining GAM in 2008 he was a partner and portfolio manager with Marshall Wace Asset Management for eight years, managing one of Europe’s largest technology, media and telecoms hedge funds.
