A small number of companies are making a large difference to the performance of lots of KiwiSaver members’ investments.
Photo: 123rf
A small number of companies are making a large difference to theperformance of lots of KiwiSaver members’ investments.
Funds with exposure to sharemarkets have performed better than those invested in other assets over KiwiSaver’s lifetime so far, but what shares they have invested in is important.
Research shows that, in the period of 1990 to the end of December 2020, Spark delivered 12.06 percent of all the gross wealth creation in the New Zealand market, followed by Fisher & Paykel Healthcare with 9.6 percent and Meridian with 8.29 percent.
Globally, Intel was responsible for 17.24 percent of net global accumulated wealth creation during that time, Oracle 18.24 percent and Disney 18.56 percent. Disney delivered the biggest impact but its share price started to drop after the end of the period.
Pie Funds founder Mike Taylor said it was striking but not surprising how much impact a few companies could make on how well investments performed.
“Just 2.4 percent of firms globally accounted for all net wealth creation between 1990 and 2020, with the top five – Apple, Microsoft, Amazon, Alphabet, Tencent – responsible for over 10 percent of the total.
Mike Taylor, founder of Pie Funds.
Photo: Supplied / Pie Funds
“I see this as a logical feature of how markets work rather than a concern. Capital markets are efficient at directing resources toward the strongest businesses, and competitive dynamics naturally result in a small number of dominant companies pulling away from the pack over time. Network effects, scale advantages, and compounding returns all reinforce this. The weak get weeded out; the strong get stronger.”
He said it reinforced the case for broad diversification in KiwiSaver.
“A fund that is well diversified will capture those outlier winners, whereas a narrow portfolio risks missing them entirely … missing just a handful of the top performers dramatically erodes long-run returns.
“As for whether concentration will persist going forward, who knows. The underlying dynamics haven’t changed, and if anything the platform economy and AI may accelerate winner-takes-most outcomes. The names at the top may rotate, but the pattern of extreme concentration may not.”
Gertjan Verdickt, a senior lecturer in finance at the University of Auckland, said it was something that would definitely continue, and had been seen in recent years with the performance of companies like Nvidia.
Gertjan Verdickt, a senior lecturer in finance at the University of Auckland.
Photo: University of Auckland
“Two things are true at the same time: the market return is positive – you have a positive risk premium, and on average, less than 50 percent of individual stocks can beat the risk-free rate on a monthly, yearly, and decade basis. Why? Because the stock returns are skewed: there are a few big outliers that increase the market return. That’s why you diversify.
“Take the New Zealand example, you can decide not to invest in Spark, but then you can only get 88 percent of the total NZ wealth creation between 1990 and 2020. Is that a problem? No, you can still outperform and have a nice return, but you lower your potential.
“We all know that diversification is to lower the risk of firm-specific elements. But people tend to forget that you also want to increase the chance of having one of the big outliers in your portfolio. So, to me, this matters.”
Greg Smith, investment specialist at Generate, said it could feel uncomfortable when market performance was concentrated in a handful of names, but it was normal.
Generate investment specialist Greg Smith.
Photo: Supplied
“That pattern shows up repeatedly through history – whether it’s industrials, energy, or today’s large-cap leaders – and is simply the outcome of innovation, scale and competitive advantage compounding over time.
“During the 19th century, railroads didn’t just influence markets – they largely were the market. In the US, railroad securities made up the majority of listed stocks for much of the period, and at one point accounted for around 80 percent of trading on the New York Stock Exchange. Similarly, globally, rail companies were among the most capital intensive and widely held businesses, attracting huge domestic and foreign investment. Railroads absolutely dominated returns and shaped overall market performance.
“But that dominance came in two very different phases. In the early boom, prices ran ahead of reality, with heavy speculation, weak underlying economics in many projects, and ultimately sharp collapses when expectations weren’t met. That’s much closer to what people think of when they worry about tech today – a narrative-driven bubble. However, over the longer run, railroads genuinely became the backbone of economic growth and delivered real returns.
“What is different in this cycle, however, is the source of concentration. Yes, returns have been skewed, and a small group of mega-cap companies have carried a large share of index performance – but importantly, that leadership has been backed by exceptionally strong earnings growth. In recent years, a significant portion of market gains has been driven by profits rather than rising valuation multiples, and a relatively small group of companies has contributed a large share of overall returns. This matters, because it suggests the concentration we’re seeing is less about speculation and more about where economic value is genuinely being created.”
He said it meant the current AI-led cycle was different from past “tech manias”.
“Technology has clearly been a major driver of returns, but unlike the dot-com era, today’s leaders are delivering real, substantial earnings growth with Nvidia’s recent results a clear example of that dynamic. Over the past five years, the rally has been driven far more by profit growth than by valuation expansion, meaning markets have been asking companies to deliver – and, so far, they largely have.
“The open question now isn’t whether the leadership is too narrow, but whether that level of earnings growth can continue … Concentration is inevitable in equity markets – diversification is how you live with it.”
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