Is diversification in equity indexes a myth?
With some indices becoming more reliant on the returns from a small number of stocks, actively managed portfolios are likely to perform better when the market rebalances
IT HAS been a volatile start to the year for global financial markets – the kind of environment that amply demonstrates the value of having a well-diversified portfolio.
The MSCI All Country World Index (ACWI) seems to tick that box, with more than 2,600 large and mid-cap companies.
However, our analysis shows that, much like US stock indices, the ACWI has also become increasingly reliant on the returns generated by a small handful of stocks, mainly in the tech sector. Last year, the Magnificent Seven stocks (Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta and Tesla) were responsible for 45 per cent of the index’s return. That share is even greater than might be expected given their cumulative average weight in the index of 19 per cent.
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