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Global dominance of biggest stocks rises to highest in decades

Global stock market concentration has risen to its highest level in decades, increasing risk for passive investors.

The 10 largest stocks in the MSCI All Country World Index now account for 19.5 per cent of the widely followed benchmark of 23 developed and 24 emerging countries. This is up from less than 9 per cent as recently as 2016 and well above the dotcom era peak of 16.2 per cent in March 2000, according to MSCI data stretching back to 1994.

In the MSCI World Index, which covers developed markets only, the 10 heavyweights — which are all American companies — are now 21.7 per cent of total market capitalisation, helping drive the US share of the index to almost 71 per cent.

Concentration “is as high as it has been, certainly for the past three decades, potentially even longer”, said Dimitris Melas, head of index research and product development at MSCI.

The degree of concentration is in reality even higher still as the top 10 includes two separate share classes of Alphabet, the parent of Google, alongside five of the other so-called Magnificent Seven stocks and three other US companies: Eli Lilly, Broadcom and JPMorgan.

Within US markets, the 10 behemoths are now 28.6 per cent of total stock market capitalisation, up from 11.9 per cent in 1995 and the highest level since 1966, according to data from Elroy Dimson of the University of Cambridge and Paul Marsh and Mike Staunton of the London Business School.

The growth of the global giants potentially poses a risk to investors seeking the benefits of diversification — which is traditionally coveted by investors as a way to enhance returns without taking additional risk — in index-tracking vehicles such as exchange traded funds.

“With 71 per cent concentration in one country investors are disproportionally exposed to the macroeconomic environment of the US and primarily American investor sentiment, and you are not getting the diversification you might expect from investing in a global ETF,” said Todd Rosenbluth, head of research at VettaFi, a consultancy.

Nicholas Hyett, investment manager at Wealth Club, a UK-based investment service, said: “For the last decade or so, collective wisdom has said you should just stick your money in a global tracker and leave it at that. After all, what better diversification could there be than investing a little bit in every listed company in the world?”

“But lower risk doesn’t mean no risk,” Hyett added. “During the [2007-08] financial crisis the global stock market fell nearly 40 per cent. Today’s more concentrated stock market is more prone to substantial falls in value.”

Both US and global stock market concentration fell between the 1960s and the 2007-08 crisis, before rising sharply.

Marsh believed the trend was related to the increasingly oligopolistic nature of many industries: the LBS team’s data points to the 10 largest stocks accounting for 38.1 per cent of the US stock market in 1900, during the era of the robber barons.

“The industry concentration we are seeing now is all about technology,” Marsh said. “What we have seen in the tech industry is monopoly power, but not the kind of monopoly power that regulators were used to regulating.”

“It’s more like a kind of natural monopoly. [These dominant companies] tend to grow extraordinarily large and regulators haven’t got their mind around whether they should be broken up in some way. We haven’t had a Standard Oil moment,” Marsh added, alluding to the company that was dismantled by the US government in 1911.

Nate Geraci, president of The ETF Store, a financial adviser, said that at some point investors might benefit from avoiding dominant mega-cap stocks, but that it was “extremely difficult” to time any switch.

“It’s important to remember that longer-term investors have received substantial benefit from this growing concentration as the largest stocks have powered higher over the past decade,” Geraci said.

“Can this work the other way to the detriment of investors? Of course, but if the last several years have taught us anything, it’s that trying to time the demise of market cap-weighted indices is a fool’s errand.”

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