Investment funds: formal diversification, substantial concentration
Over 390 billion dollars from mutual funds distributed in Italia have been invested in shares of the ‘Magnificent Seven’
On paper, hundreds of shares, dozens of countries, a wide range of sectors. In reality, a growing proportion of the returns on the managed investment products held in Italians’ portfolios depends on the performance of just a handful of shares: Alphabet, Amazon, Apple, Meta, Microsoft, Tesla and Nvidia, first and foremost. It is no longer enough to open the prospectus of a global equity fund and read the reassuring phrase ‘portfolio diversified across over 500 securities’ to be sure you haven’t put all your eggs in one basket and to avoid the associated risks. Diversification is not measured by the number of holdings, but by the distribution of risk.
Not only benchmark indices (and therefore the ETFs that faithfully track them), but also actively managed mutual funds, have a disproportionate share of their assets invested in shares of the so-called ‘Magnificent Seven’. The figures speak for themselves. Taking into account only investors’ indirect exposure to these companies via mutual funds (excluding ETFs, insurance policies and pension funds), the figure exceeds $390 billion. That is almost double the $204 billion recorded a year ago.
These are unequivocal figures that emerge from an analysis of the portfolios of the 5,755 equity and balanced funds distributed in Italia, carried out using the Mpower.Finance database, powered by Morningstar. It should be noted that some of these funds are also invested abroad, but the figure remains substantial. Sixteen funds push the concept of ‘concentration’ beyond the maximum threshold of 10 per cent of the portfolio permitted by the relevant regulations for a single security. And it is not uncommon to find funds with portfolios that are excessively weighted towards these seven big tech companies, with their combined weighting reaching as high as 40 per cent. Their influence is dominant in determining the fund’s performance.
In favourable market conditions, with rising prices, concentration may appear to be a driver of performance. The problem could arise if one envisages a scenario of a possible sharp and widespread correction in these shares, with knock-on effects across the entire asset management ecosystem and, consequently, on household wealth. Formal diversification, therefore, does not eliminate the systemic risk associated with the substantial concentration revealed by portfolio analysis. Recognising this paradox does not mean demonising big tech firms, nor the funds that hold them. Rather, it prompts us to ask ourselves a question: are we really diversifying our savings, or are we simply delegating to fund managers and indices the very same concentrated bet on a handful of securities?
