The 'magnificent seven' have been the biggest driver of global markets in the past year, but some are concerned about the concentration of the seven stocks in global allocations.
The tech stocks Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla, were went gangbusters in 2023 and continue to perform well.
The average exposure to the US in the Asset Allocator database currently stands at 16.3 per cent and a significant proportion of this will be exposure to the magnificent seven.
At the end of January, 7IM’s portfolio included an 18 per cent exposure to the US, up slightly from 17 per cent at the end of November 2023.
Sam Hannon, investment associate at 7IM, says: “The high global allocation to the US, in and of itself, is not so much of a concern – after all, it is the largest economy in the world.
“However, what does concern 7IM is the concentration of just seven stocks within this global allocation.
“With seven stocks forming around 18 per cent of the MCSI ACWI index, these put investors at risk of any small change in expectations.”
To address these concerns, Hannon says 7IM prefers an allocation to a more equally weighted US exposure.
He adds: “This provides some protection if the bubble were to burst, but still can also do well if the leadership of the US equity market broadens, which seems likely from here.”
Elsewhere, our database shows Hawksmoor has an 9 per cent exposure to the US - one of the lower allocations and well below average - a level it has stuck at for some time.
Richard Philbin, Hawksmoor's chief investment officer, said the key is to "know what you're buying" when you invest in US equities - and he said this was an area where active funds had an advantage.
He said: "Through our data providers we can get holdings data for all the funds we have exposure to, and then it’s simply just a case of multiplying weights appropriately. But, by default, it’s relatively easy in active portfolios due to the rules relating to portfolio concentration through the 5/10/40 guidelines, which control weights.
"Obviously this is less easy to do with a passive fund or ETF funds due to the weight of the magnificent seven in the index needing to be replicated in the funds."
And when asked whether there was any way to avoid being too exposed to the seven stocks, Philbin suggests: "There are 500 in the S&P 500 and there are over 1,600 companies in the MSCI World, so it’s not that difficult a task to undertake. Having a relative underweight to the US, or having a relative underweight to technology, will reduce your allocation, as would having a higher exposure to “value” strategies for instance, which will change this number."
Timothy Woodhouse, who runs the £500mn JPM Global Unconstrained Equity fund, has an overweight to tech stocks and four of his 10 biggest holdings are members of the magnificent seven.
He said market concentration on its own was not necessarily a problem.
Woodhouse said: "The market is now higher quality than it used to be, even if it is more concentrated. Higher free cashflow margins at the magnificent seven have made the index less cyclical, and that has historically been a defensive characteristic in risk-off environments.
Given the performance of the magnificent seven has followed the fundamentals, rather than being an expansion of the multiple, I don’t think global investors should be concerned about being overexposed to the group, or to the US – instead they should be embracing the exposure to growing businesses – although the magnificent seven are not all equally attractive investments."
Darius McDermott, investment adviser to the Chelsea Managed Funds range, says considerable exposure to the US would be expected in any global fund as it makes up 70 per cent of the global index.
A look at Asset Allocator’s database shows Chelsea Financial Service currently holds nine global equity firms.
McDermott adds: “What you might expect to see is an underweight to the US in some global funds, especially those with value style.
“Also, global income funds tend to be massively underweight on the magnificent seven as they are not really dividend payers.
“So either a value or income fund would be a way to buy global with little or no exposure to the magnificent seven.”
Indeed the popularity of the JPM US Equity Income fund in the Asset Allocator database suggests portfolio managers are looking for exposure to Wall Street which addresses this conundrum.
Peter Wasko, senior portfolio manager at Copia Capital Management, said he applied this thought process to US and global funds.
He said: "We have some exposure to the magnificent seven, through active and passive US and global funds, but have positioned portfolios in a way that avoids too much concentration in these names due to concerns about valuations of some large cap growth stocks. From a style perspective, we have tended to favour value and income strategies, and these often have little to no exposure to the magnificent seven.
"Outside of style, we can allocate outside of the US and currently have a more favourable view on UK, Japan and Europe in developed markets."
However looking at the market overall, Chris Beauchamp, chief market analyst at IG Group, tells Asset Allocator US stocks are still a solid bet for investors compared with what he calls a "gloomy" outlook in Europe.
He adds: “There’s no way round it unfortunately; the US has been almost the only driver of global stock market growth in recent years, so while it’s important not to boost exposure too far, managers risk missing out on returns if they sell out of strong-performing US stocks to buy cheaper but poorer-performing stocks in other locations.”
Tara O'Connor is a senior reporter at FT Adviser
