Investment Strategies
Cutting Concentration Risk By Seeking Wider Opportunities Is "Working" – Schroders

The UK wealth manager talks about how it thinks the approach of seeking opportunities beyond established US large cap stocks is showing its value.
Widening the range of investments to reduce concentration risk in portfolios is working, Schroders says.
After a period in which market leadership was unusually concentrated among a handful of US large firms, opportunities are emerging across a wider range of asset classes, sectors and regions, according to Dorian Carrell, who heads the multi-asset group at the UK-based wealth and asset manager, said in a note.
“Accommodative policy, sufficient easing in geopolitical tensions and continued strength in artificial intelligence (AI)-related growth are helping to create a more supportive backdrop for diversified investors,” Carrell said.
Concentration risk, and how to mitigate risks from it, has been a theme in wealth management for some time, evidenced by how the “Magnificent Seven” mega-cap tech stocks, such as Google, Amazon, Apple and Nvidia drove a disproportionate share of overall equity market returns. In his note, Schroders’ Carrell said that while a broadening of opportunities does "not mean that risks have disappeared. Beneath the surface, there are still potential icebergs to navigate.”
“Sticky inflation, fiscal deficits and rising Treasury supply continue to put pressure on the long end of bond markets. Energy security remains fragile, while the extraordinary pace of AI investment is raising questions around capital intensity, free cash flow, financing structures and intensifying competition,” Carrell said.
While US corporate earnings' growth remains impressive, it is also exceptionally concentrated. A relatively small group of companies continues to account for a disproportionate share of that growth, leaving headline market performance heavily dependent on expectations being met by a narrow set of businesses.
Concentration risk is a regular topic. At the SALT conference in London, an investment panel moderated by this publication yesterday, heard that it is difficult to avoid the issue because Big Tech firms, such as AI-related “hyperscalers,” have delivered such stellar returns. That said, diversification is an ever-present issue for wealth managers in the medium term, given an understanding of past business cycles. (See related commentaries about concentration risk here, here and here.)
Vortex
“Those expectations have created what we see as a valuation
vortex,” Carrell said. “Strong performance attracts capital,
which supports higher valuations and increasingly ambitious
forecasts, drawing in still more capital. This dynamic can
persist, especially while earnings remain supportive. But it also
raises the potential cost of disappointment, as elevated
valuations leave less room for companies to fall short of market
expectations,” he continued.
“This does not mean we are turning away from technology. Agentic AI continues to capture headlines, and we believe the development of AI systems capable of completing increasingly complex tasks could create significant opportunities. However, the investment implications are unlikely to be confined to the current market leaders. As adoption expands, opportunities should emerge across the infrastructure, software and services needed to deploy AI, as well as among companies able to use the technology to improve productivity or develop new sources of revenue,” he said.
Investors should focus on details around the AI investment cycle.
“Capital expenditure is rising rapidly, putting pressure on free cash flow, while off-balance-sheet and circular financing arrangements may make the true scale and distribution of risk more difficult to assess. Intensifying competition from open models could also challenge assumptions about pricing power and the returns ultimately generated from today’s investment,” he said.
Carrell said he regards healthcare remains as one of Schroders’ preferred diversifiers, given its relatively low correlation with the broader equity market.
Earnings data in the healthcare sector show that earnings are at the strongest level since 2021.
The “broadening” thesis also supports some redeployment of capital outside the US stock market.
“Within equities, we continue to tilt towards international markets, where valuations are generally less demanding and market performance is less reliant on a narrow group of companies.
“We favour banks and commodities in particular. Banks can benefit from a more supportive earnings environment where interest rates remain above the exceptionally low levels seen during the previous cycle. Commodity-related companies, meanwhile, provide exposure to areas where supply discipline, infrastructure investment and energy-security priorities can support returns,” he added.