The seemingly unstoppable power of the “Great Seven” means these are exciting times to be a passive investor. But as someone who uses her stocks and shares Isa primarily to invest in low-cost global tracker funds, the 'excitement' was not what I thought I was signing up for.
The valuations of those seven tech-focused US giants — Microsoft, Nvidia, Apple, Amazon, Google parent Alphabet, Meta, and Tesla — have collectively risen nearly 20 percent year-to-date on hopes that AI will spur their future growth prospects. . Of these companies, Tesla has been the least impressive, down 30 percent year-to-date, but Nvidia is up a staggering 83 percent.
How this translates into your portfolio's performance depends on the exact type of passive fund you have, but the Mag 7's dominance means it makes up a growing segment of global index-tracking funds.
Should this worry us? On the one hand, it's hard not to feel happy when your tax-exempt investment shows healthy gains in performance. But the high concentration risk has me wondering whether I should continue with a passive strategy next tax year.
“Boring is good” is an investing mantra I've repeated in this column many times before. Like many passive enthusiasts, I don't try to beat the market, but I regularly buy a slice of the market. Yes, I could try to strive for higher returns by investing most of my money in actively managed funds, or try my hand at stock picking myself, but countless studies show that the long-term effect of consistently (and cheaply) achieving an average return is almost always Almost produces a better result for much less effort. For the cash-rich but time-poor investor, this last point is also key.
But should I adjust the passive funds I invest in to add greater diversification? This Jesus season, you may be thinking about the same dilemma.
A good place to start is to look under the hood of the various negative funds you may have, and determine if you are happy with those weights.
Funds that track US indices will have much higher exposure to the mag 7 (currently about 30 per cent for the S&P 500 or up to 40 per cent for the Nasdaq).
Most global equity trackers reduce this percentage to less than 20 percent, as shown in the MSCI All-Country World Index chart below.
However, over time, the top 10 stocks made up an increasing proportion (all seven are in there – although Alphabet is counted twice due to having two share classes, as well as US pharmaceutical giant Eli Lilly and chipmaker Broadcom).
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“While this level of concentration risk is greater than in recent history, when we look at the history of long-term investing, it is not With the new thing.” and transportation sectors.
Geographically, the US market is not an anomaly. The top 10 stocks make up about 30 per cent of the MSCI USA index, but this rises to just over 40 per cent for the MSCI China index; more than 48 percent for the MSCI UK index; And more than 58% for both Germany and France (note that some of these indices contain much smaller components than others).
You may also be more diverse than you realize. In the Vanguard FTSE Global All Cap Index Fund (which I hold within my ISA fund), exposure to the UK is less than 4 per cent, with the US making up nearly 62 per cent.
However, Vanguard's popular LifeStrategy fund range (which also features within my ISA fund) has an inherent bias towards the UK, which accounts for 25 per cent of the equity component. The rest is allocated on a market value-weighted basis (as of last week, the US represented about 36 percent).
I posted my bets. I am happy to have some national bias in one of the 'building blocks' in my portfolio because I think the UK is very cheap, and I can take a long-term view, although I appreciate that many readers may not share my optimism. But it also shows the dangers of letting an active mindset influence a passive strategy!
Investors could also consider increasing their exposure to passive funds that track European or emerging market indices, or diversify away from equities by considering multi-asset funds.
But there is also the risk of giving up on growth.
Norton doesn't dispute that US stock valuations are strong, but adds: “That doesn't mean they can't get stronger.”
Ultimately, it comes down to your investment time frame and your broader investment goals. What are you investing for?
I view my stocks and shares as a flexible retirement fund and hope to leave it invested for decades to come. However, if I were closer to retirement age and more risk averse, I might be more tempted to take some profits and diversify further, or even move some of the money into a cash Isa (don't forget, no inheritance tax Isa has pension benefits – you will need to spend the money).
If this is the strategy you're considering, Laith Khalaf, head of investment analysis at AJ Bell, urges investors to consider doing so gradually. “By recycling cash into a new area little by little, you get an average price over a period of time rather than risking a large amount in or out at one point,” he says.
But if you are going to commit to investing in global index funds, the other supporting element is the huge amount of money allocated to passive investments, which helps support huge share prices. However, Khalaf points out that this is another factor working against the UK, which makes up just 4 per cent of the MSCI World Index compared to around 10 per cent a decade ago.
Funny enough, it was a recent conversation with an active Money Clinic manager that confirmed my negative instincts. Ben Rogoff, manager of the technology-focused Polar Capital Trust, isn't convinced that all seven of the “great ones” can stay on the right side of the AI trade for much longer, and he's positioning his portfolio accordingly.
I wish him success! But even though he may have had the foresight to buy Nvidia over a decade ago, by choosing to adopt a passive strategy, I allowed the market to do it for me, and I gained exposure without even having to think about it. And in the coming decades, when these seven stocks become a little more remarkable, the same will be true for whatever comes to replace them.
Claire Barrett is consumer editor at the Financial Times and author of the Financial Times' Sort Your Financial Life newsletter series. claer.barrett@ft.com; Instagram and TikTok @ClaerB.
To watch a recording of the FT's free webinar on Tax-Free Investing and IASAs featuring Clare Barrett, Moira O'Neill and Timmy Merriman-Johnson, click here.
