Citywire asked: What’s spooking eight fund buyers in the investment world?

Sophie provides her response below.

What’s scaring you in the investment world right now?

The concentration risk posed by the Magnificent Seven raises some concern for us. These companies collectively account for a substantial portion of indices, with some of the Magnificent Seven representing double-digit percentages of indices and some with individual market capitalisation exceeding $3.5tn. This heavy reliance on a few firms not only impacts US indices but also many indices globally.

While the dominance of these companies cannot be dismissed, it is crucial not to rely on them entirely for portfolio growth and it simultaneously presents potential other alpha opportunities for investment managers. This scenario underscores the importance of strategic allocation and active management to navigate these risks effectively.

There are many market capitalisation ETFs which are exposed to this concentration risk. So, when allocating to ETFs, it is important to know where these concentration risks lie. Many providers are going down the ‘cheap is cheerful’ route and by doing so they are incorporating standard index replication and therefore might be failing to diversify their offerings adequately, so they may miss out on potential gains from sectors outside the tech giants.

Our multi-asset diversified investment strategy seeks to highlight the opportunities the Magnificent Seven present, while also being aware of the concentration risk it potentially poses.

And what are you afraid of in a more personal sense?

On a lighter but personal note, I have a long-standing fear of snakes which I attribute to watching the movie Anaconda as a young child. When taking my daughter around animal farms, I actively avoid the reptile section.

Click here to read other fund buyer responses on the Citywire website