Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 398

You think you're passive but are you really concentrating?

As investing rules of thumb go, 'don’t put all your eggs in one basket' is widely accepted and uncontroversial. Sure, a lot of academic work has been done on the optimal number of baskets investors should have, what each basket should be made of, even the number of eggs to include in each, but the general principle is considered a sound way of spreading risk. And more baskets are better than fewer.

The problem with rules of thumb is that they can often oversimplify things. In average circumstances, simplification is usually enough, but right now, markets are anything but average.

There's more to diversification than 'more'

In the case of diversification, the difference between the rule of thumb and a more nuanced version lies in the gap between the expression more = better and more + different = better.

For a portfolio to be diversified it can’t just have lots of things in it, it needs to be filled with assets that are going to react in different ways to the same thing.

And, by that logic, we believe, the broad market is far less diversified right now than it looks on paper, especially if you are a passive investor.

Take the FTSE World Index, for example. Using the more = better version of diversification, an investment into an index that provides exposure to thousands of stocks across the globe should provide a good degree of diversification.

But, as is evident from the chart below, which plots the stocks in the FTSE World Index, with bigger positions shown as bigger yellow circles, the index is currently heavily weighted to defensive growth stocks (see the bottom right hand quadrant).

These include companies like Amazon and Netflix, with business models almost perfectly designed to benefit from the economic climate created by a global pandemic in 2020. Those conditions have propelled these 'lockdown beneficiaries' to rich valuations and to a colossal weight in the index. So much so, that defensive growth companies now account for over 40% of the index.

Under the microscope: FTSE World Index

As at 31 Dec 2020. Source: Various industry sources, Company information, Orbis. Statistics are compiled from an internal research database and are subject to subsequent revision due to changes in methodology or data cleaning. Stocks in the FTSE World Index are ranked based on their valuations (dividend yield, earnings yield, free cash flow yield and book to price; all based on trailing 12 month fundamentals) and their beta to a basket of global yields (as a proxy for cyclicality). Figures represent the aggregate weighting of shares within each quadrant for the FTSE World Index. Figures may not sum due to rounding. Bubbles representing the top three stocks in the FTSE World Index have been labelled.

Success creates sector bets

While there is no denying that many of the companies within the bottom right hand quadrant are of high quality, many are in similar sectors and are exposed to similar economic forces, which means they won’t necessarily do a good job of diversifying risk should economic circumstances or investor sentiment change.

To put an even finer point on it, in the US market (S&P500 Index), the top five stocks now account for almost a quarter of the total. That is a level of concentration never seen before. At the height of the technology bubble in 2000 the top five accounted for less than 20% of the total.

As at 31 Jan 2021. Source: Refinitiv, Orbis.

Again, that is not to say that those five companies are bad, far from it. But rather, it points out that for every dollar invested into the broad S&P500 Index, roughly 25 cents is going into five technology stocks, all of which are in direct competition with each other in one way or another.

And, while the weight of the FANGAM stocks get the headlines, the extreme concentration seen within indices currently is not limited to developed markets. In fact emerging markets are arguably even more concentrated.

Within the MSCI Emerging Markets Index, the top 10 stocks currently account for over 30% of the total, approximately double their weighting five years ago.

As at 31 Jan 2021. Source: Refinitiv, Orbis.

As long-term, active, fundamental investors, we are no strangers to concentrated portfolios, in fact we are a firm believer in their ability to deliver outsized returns over the long run.

But, we build them intentionally from the bottom up. As we look across global markets today, that intent seems to be lacking, replaced by a fear of missing out that is leaving a lot of eggs in one very small basket. A basket predicated on the notion that the future is going to look very similar to the recent past. And, what we have learned over the past 30 years, is that the only thing we can say for certain about the future is that it seldom looks like the past.

 

Shane Woldendorp, Investment Specialist, Orbis Investments, a sponsor of Firstlinks. This report contains general information only and not personal financial or investment advice. It does not take into account the specific investment objectives, financial situation or individual needs of any particular person.

For more articles and papers from Orbis, please click here.

 

  •   10 March 2021
  • 5
  •      
  •   

RELATED ARTICLES

The diversification illusion: why 'balanced' portfolios may be exposed

Investors might be paying too much for familiarity

The problem with concentrated funds

banner

Most viewed in recent weeks

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

Back to the future - Why indexing CGT is a good idea

A return to indexation of capital gains would be a fairer way to compensate households for the effects of inflation than the current discount. Importantly, it opens the door to future, broader reforms to stop the taxation of inflation.

The investment mistake killing your returns

Retail investors face an increasingly complex product environment, but simplicity may be the most overlooked advantage in building a portfolio you can actually live with.

Latest Updates

Investment strategies

Choose your hedges wisely… and often

A new market regime is exposing the fragility of static hedges. With correlations shifting and safe havens flipping, investors must rethink diversification and adopt more adaptive tools to protect capital.

Investment strategies

Yields take centre stage again

The Australian credit landscape is shifting. Yields are rising, issuance is strong and spreads continue to tighten. Income is re‑emerging as the dominant driver of returns, though pockets of risk may be building beneath the surface.

Investment strategies

The grass is always greener: Rethinking Australian vs global equities

Australia's once‑dominant sharemarket is losing ground as others surge ahead, prompting investors to question home‑bias instincts. Meanwhile, the US market appears attractive. Is it time to revisit your global equity allocation?

Investment strategies

Stop asking if there's a stock market bubble. Ask this instead.

Markets continue to push onwards despite valuations looking stretched by historical standards. Bubble talk is rampant, however investors may be focusing on the wrong thing. The real story sits deeper than the headlines.

Taxation

The GST cannot stop inflation

Raising the GST when inflation jumps sounds clever on paper, until we examine how it may play out in practice. What is pitched as a simple inflation fix can lead to a sharp turn in the wrong direction for prices.

Shares

Why SpaceX is coming to your super fund

SpaceX’s blockbuster debut is grabbing headlines, but the real story for Australian investors is much quieter. Giant listings eventually filter into super funds and ETFs, subtly reshaping portfolios long before most realise.

Taxation

Is the government being honest with us about its business CGT changes?

The government’s assurances on small‑business concessions don’t withstand the scrutiny. Token carve‑outs and a lack of credible rationale for CGT changes may reshape how Australia rewards long‑term value creation. 

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.