He says most New Zealand KiwiSaver members and global investors get their international exposure through cap-weighted indices – where individual stocks are weighted proportionally to their total market value.<\/p>\n
The top 10 stocks in the S&P 500 now account for around 40% of the index\u2019s capitalisation. Gardyne says that is double their share in 1990 and the highest level of concentration since the early 1970s.<\/p>\n
Eight of the top 10 stocks in the index are exposed to artificial intelligence (AI) as chipmakers, hyperscale cloud providers (data centres) or AI-platform owners. They are Nvidia, Apple, Microsoft, Amazon, Alphabet Group (owner of Google and YouTube), Broadcom, Meta Platforms (Facebook, WhatsApp, Instagram) and Tesla.<\/p>\n
The other top 10 stocks are Berkshire Hathaway, and Micron Technology or Eli Lilly or Walmart depending on day-to-day trading and share price fluctuations.<\/p>\n
Chipmaker Nvidia, the largest company in the world on market capitalisation with a valuation of more than US$5.2 trillion, makes up nearly 8% of the S&P 500 Index (at the time of writing).<\/p>\n
AI powerhouse Nvidia posted a profit of US$26.4 billion on record revenue of US$46.7b in the recently ended quarter. Photo \/ Getty Images<\/p>\n
Gardyne says \u201ca single stock representing close to one-12th of the entire US market is something we haven\u2019t seen since IBM in the 1970s \u2013 and we know how that ended.\u201d<\/p>\n
Over the past 12 months, the S&P 500 has risen 27% and in year-to-date more than 9%. In the eight weeks to the end of May, alone, the S&P 500 had risen 17.5%.<\/p>\n
Gardyne says about 80% of the index\u2019s gain this year has been driven by AI-linked stocks: \u201cSemiconductors and semiconductor equipment stocks \u2013 just one industry group \u2013 have generated around 50% of the index\u2019s year-to-date return, from only 15% of its weight.<\/p>\n
\u201cOnly about one in five stocks in the S&P 500 has outperformed the index this year. That is an extraordinarily narrow market. Most stocks are not, in fact, going up.\u201d<\/p>\n
Gardyne says the US stock concentration story is also elsewhere. The South Korean KOSPI has risen more than 80% this year, with two memory chip companies Samsung and SK Hynix making up 42% of the entire index.<\/p>\n
Taiwan Semiconductor Manufacturing Co now represents more than 14% of the MSCI Emerging Markets Index – the largest single-stock weight the index has carried in 30 years.\u2019<\/p>\n
Gardyne says the MSCI World Index which most New Zealand investors hold through their KiwiSaver fund\u2019s global allocation, has Nvidia as its largest position.<\/p>\n
\u201cWherever you look, the same handful of stocks, the same (AI) theme and the same supply chain keep appearing.<\/p>\n
\u201cInvestors buying a low-cost global index fund believing they are getting safe, broad exposure across thousands of businesses are, in reality, taking a very large and specific bet,\u201d he says.<\/p>\n
\u201cThey are betting on AI infrastructure spending continuing to accelerate, on a small group of customers \u2013 principally four US hyperscalers and a handful of AI labs \u2013 and on a supply chain that runs through Taiwan and Korea.<\/p>\n
\u201cBut it is an active bet sitting inside a passive product, and most investors do not know they are making it.\u201d<\/p>\n
Gardyne says now is a good time for investors to check what is in their portfolios, and how much of the top 10 is in the hands of technology beneficiaries and whether they are happy with that.<\/p>\n
Investors buying a low-cost global index fund believing they are getting safe, broad exposure across thousands of businesses are, in reality, taking a very large and specific bet.<\/p>\n
Ashley Gardyne<\/p>\n
\u201cActive managers don\u2019t think the market is providing sensible diversification, and it\u2019s important for an investor to go in with eyes wide open.\u201d<\/p>\n
None of this is a call to abandon exchange traded funds or index investing, he says. The benefits \u2013 costs, simplicity, broad market exposure \u2013 remain real and trying to time these cycles precisely is a fool\u2019s errand.<\/p>\n
But there are some sensible things to think about:<\/p>\n
Understand what you actually own. The label on the fund matters less than the underlying holdings. A global fund in 2026 may be a much narrower bet than its name suggests.Consider whether the equal-weighted version of the major indices, which give every stock the same weight rather than rewarding the biggest, might form part of a diversified portfolio.Think more broadly about geographic and sector diversification \u2013 emerging markets such as Asia, and healthcare, financial, industrial and quality value companies have all been left behind by the AI trade and may offer better risk-adjusted opportunities.<\/p>\n
Gardyne says historically, after periods of high concentration, equal weighted indices have outperformed their cap-weighted equivalents.<\/p>\n
Research by Goldman Sachs, looking back over a century of US market data, shows that periods of extreme concentration have consistently been followed by below-average forward returns.<\/p>\n
Gardyne says Goldman Sachs\u2019 work currently implies a real return for the S&P 500 of close to zero over the next decade \u2013 not because the underlying businesses are bad but because concentration this extreme tends to revert back to their historical average levels.<\/p>\n
The dot.com peak in 2000, the Nifty Fifty in the early 1970s and the financials concentration of 2007 all unwound the same way, he says. The cap-weighted index spent years underperforming the equal-weighted equivalent as the stock leadership broadened.<\/p>\n
In the 2020 Covid sell-off, stocks with higher exchange-traded fund ownership experienced greater volatility on the way down.<\/p>\n
\u201cThat risk has not really been tested at the current level of concentration but the structure is now there for it to play out,\u201d says Gardyne.<\/p>\n
\u201cThe part I find most uncomfortable is what is happening underneath the headline numbers. A growing share of recent gains have come from the more commoditised parts of the semiconductor market \u2013 particularly memory chips made by Micron, Samsung and SK Hynix.<\/p>\n
\u201cMemory has historically been one of the most cyclical industries in the world. Prices rise, every producer ramps up capacity and within 18 months supply catches up and prices fall 50-80%.<\/p>\n
\u201cRight now, we have record-high prices and record-high capital spending on new semiconductor fabrication facilities that come online from 2027. The pattern is not new.\u201d<\/p>\n
Gardyne says on the demand side, hyperscaler (Google, Amazon, Microsoft, Meta) capital expenditure on AI and data centres is genuinely enormous \u2013 US$600-$700 billion this year alone and US$4 trillion over five years.<\/p>\n
\u201cThat is real, contracted spend and over the long run it will likely prove worthwhile. But it is being underwritten by a small number of AI model providers and the financing arrangements have become increasingly interlinked.<\/p>\n
\u201cChipmakers investing in their own customers, customers committing to buying chips with money raised from bond markets, and equipment vendors taking equity in fabs.<\/p>\n
\u201cIf any one part of this slows \u2013 a bottleneck in power supply, a cash flow problem at one of the AI model providers, a single hyperscaler trimming spend \u2013 the impact can ripple quickly through the whole chain.<\/p>\n
Model providers OpenAI and Anthropic, which developed the AI assistant Claude, are planning to list with mega initial public offerings.<\/p>\n
\u201cTheir valuations will be trillions of dollars and they add another large portion to the index,\u201d says Gardyne. \u201cThe result is even more concentration in the AI thematic \u2013 the tech stocks may account for 45% of the S&P 500.\u201d<\/p>\n
He says history offers a useful warning. At the peak of Japan\u2019s asset bubble in 1989, Japanese equities made up close to 45% of the MSCI World Index.<\/p>\n
A global index investor was, without realising it, almost half-invested in a single overvalued market. The Nikkei Index fell more than 80% over the following decade and took 31 years to reclaim its 1989 high.<\/p>\n
Gardyne says today Japan has around 5% of the MSCI World Index; the United States has around 70%.<\/p>\n
\u201cThe lesson from Japan was not that Japan was a bad market \u2013 it was that buying more of the most expensive stock, at the moment of peak enthusiasm simply because it is the biggest weight in the index, has historically been a poor strategy.<\/p>\n
\u201cNow is the time to be really selective,\u201d he says. \u201cIf you look at an average US company, excluding the AI businesses, earnings are still growing, something like 8% a year \u2013 now that\u2019s a pretty decent return.\u201d<\/p>\n
Fisher Funds is a sponsor of the Herald\u2019s Capital Markets and Investment report.<\/p>\n","protected":false},"excerpt":{"rendered":"He says most New Zealand KiwiSaver members and global investors get their international exposure through cap-weighted indices –…\n","protected":false},"author":2,"featured_media":471051,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[7615,1558,26224,138,3027,10797,238089,4501,36090,2082,36091,18361,13986,329,321,194,111,139,69,238088,169655,766,9979,7192,7420,48427,427,3502,5662,8218,110683],"class_list":["post-471050","post","type-post","status-publish","format-standard","has-post-thumbnail","category-business","tag-7615","tag-been","tag-broad","tag-business","tag-concentration","tag-cycle","tag-diversified","tag-elevate","tag-fisher","tag-for","tag-funds","tag-graham","tag-index","tag-investing","tag-investors","tag-kiwi","tag-new-zealand","tag-newzealand","tag-nz","tag-passive","tag-poses","tag-reports","tag-right","tag-risk","tag-sp","tag-skellern","tag-story","tag-success","tag-think","tag-warns","tag-youd"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/471050","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=471050"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/471050\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/471051"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=471050"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=471050"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=471050"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}