Equities – Feature
With stock markets becoming increasingly concentrated, could thinking outside the box become a more prudent choice for pension schemes? Mona Dohle reports.
trading in London fell to 1,858 in 2015 from its 2,913 peak in 2006. The shrinking membership of Western stock markets is driven by a combination of factors, including the rise of private equity, mergers and acquisition and, in particular, the abundance of alternative financing models born out of a zero-interest rate environment.
It also coincides with the emergence of index investing. And with most leading stock market indices being market-cap based, a handful of firms have grown to dominate global stock market indices. For example, a scheme might hold an ETF designed to mirror the performance of the MSCI World in combination with US equity ETFs. But due to the market cap- based nature of both indices, the scheme will be largely invested in the same handful of firms across both funds. In each case, the FAANG stocks are likely to account for the top five positions in the fund’s portfolio.
More than 66% of MSCI World is held in US stocks and some 12% are invested in the FAANGs, hardly making it a globally diversified portfolio. In the aftermath of the global financial crisis, the money managed by the global fund industry has sky- rocketed to more than $51trn (£39.5trn) from $12trn (£9.2trn) in 2009, according to EFAMA. In other words, a rapidly grow- ing amount of investor cash is chasing the profits of a dwin- dling number of companies. Pension schemes, which are increasingly invested in passive funds, are part and parcel of this trend. More than half of all equity assets held by UK schemes are managed passively, while defined contribution (DC) schemes hold virtually all their assets in passive funds.
The trend towards concentration has been accelerated by the Covid pandemic, argues Daniel Booth, chief investment officer at Border to Coast. “When you look at the concentration of markets by top stocks, you’ll see that the top 10 stocks, coun-
Issue 97 | October 2020 | portfolio institutional | 45
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