Artificial intelligence has become one of the defining themes of markets in recent years, but as concentration has risen, some investors have become increasingly concerned.
Currently, 32% of the MSCI ACWI is in tech businesses, with the top 10 companies by market cap dominated by AI-aligned companies such as Nvidia, Apple, and TSMC. Concentration becomes even more extreme in other markets, with TSMC now representing 15% of the MSCI Emerging Market index alone.
Saftar Sarwar, CIO at Binary Capital, said: “A ‘diversified’ global portfolio is often not that diversified.
“Growth funds, index funds, even so-called balanced portfolios are often exposed to the same handful of names.”
Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC), said: “One argument against the bubble theory has been that the earnings from the big tech giants have been so strong, they have easily covered their expenditure.”
However, as the hyperscalers have started to rely more on debt to fund their operations, and comparisons to previous market bubbles have become more common, some investors are looking to diversify their exposures.
See also: Janus Henderson: 67% of investors are concerned about an AI bubble
One area that wealth managers said looked particularly interesting as a hedge against this is UK equities.
Binary Capital’s Sarwar said: “UK equities have spent a decade unloved, and undervalued, for exactly the reason that now could look like an important advantage: minimal AI and technology exposure.”
Tomiko Evans, CIO at Crossing Point Investment Management, added: “The UK market has a very different sector composition from global equity indices, with greater exposure to financials, energy, healthcare, consumer staples and other cash-generative businesses.”
Sarwar highlighted Temple Bar Investment Trust, which invests primarily (but not entirely) in UK stocks, with very little (2%) in technology shares.
Over the past one, three, five and 10 years, the trust has ranked as one of the best performing strategies in the IT UK Equity Income sector, according to data from FE fundinfo.
Jason Hollands, managing director at Bestinvest, also praised the Temple Bar fund, noting that it was run by “veteran investors” in Nick Purves and Ian Lance.
Keeping in the UK space, Crossing Point’s Evans also liked Murray Income Trust, which has just 4% in technology and has recently brought on the accredited Artemis UK team to help run the trust.
“Rather than simply owning the traditional large-cap UK income names, the managers can look across a broader range of companies that can generate cash, pay sustainable dividends and offer scope for capital growth,” Evans said.
The flexible, cash-flow-focused approach can help investors reduce tech concentration without moving fully into defensive assets, she said.
Binary Capital’s Sarwar also highlighted Merchants Trust, City of London and Law Debenture as other options within the UK trust space.
See also: Covered: The renaissance of the UK market
Beyond the UK
Crossing Point’s Evan also pointed to European equities as a compelling option, through JPMorgan European Growth and Income run by Alexander Fitzalan Howard, Tim Lewis and Zenah Shuhaiber.
Evans said: “Its approach combines quality, value and earnings momentum, allowing the managers to seek companies with attractive growth prospects while remaining disciplined on valuation.
“More broadly, it offers exposure to European companies where growth is coming from a wider range of sectors than technology alone.”
For a more global perspective, Binary Capital favoured the Invesco Global Equity Income portfolio, as an “interesting play away from growth sectors, due to its limited technology exposure (18%).
“It is good to look past the obvious emerging markets,” Binary Capital added. While Korea and Taiwan are now heavily concentrated around tech, emerging frontier markets through the BlackRock Frontiers Investment Trust seemed compelling, according to Sarwar.
“[BlackRock Frontiers Investment Trust] has 52% in financials, and investing in countries such as Poland, Egypt and Turkey is an interesting diversifier away from technology-focused core emerging markets.”
For investors after a more one-stop-shop approach, BestInvest’s Hollands said Troy’s Personal Assets Trust was a “standout” option.
The trust is a multi-asset approach focused on capital preservation, investing across a range of equities, inflation-linked government bonds, short-dated government bonds and gold.
“Equities currently account for around 36% of the portfolio, and notably none of the major semiconductor stocks features among its top ten holdings.
“While Personal Assets is unlikely to shoot the lights out in a raging bull market, it has historically demonstrated resilience during periods of market stress, making it an attractive option for more risk-averse investors,” Hollands concluded.
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