Concentration risk is rising, with increasing numbers of markets becoming heavily weighted towards a small number of firms and securities.
One example of this is the US, where the so-called ‘Magnificent 7' stocks now make up around one third of the S&P 500 by market capitalisation. Emerging markets are another case in question – with just three semiconductor giants from Taiwan and South Korea make up nearly 30% of the entire MSCI EM Index, a benchmark which is supposed to represent 24 different countries and over 1,100 stocks.
The UK bond market shows similar patterns and the sterling investment-grade corporate bond market is far narrower than its global equivalent – with its top three sectors making up over 50% of the index and the top 20 issuers accounting for over a quarter of the market.
There is also significant concentration in UK gilts – with defined benefit schemes both holding a significant portion of the market and the consequent exposure to a single borrower, the UK government.
But what does this concentration mean for defined benefit (DB) and defined contribution (DC) schemes and how can they mitigate the risks? PP asks a selection of experts from across the industry for their thoughts...
Is the absolute exposure to a single sovereign still acceptable?
In our view, equity concentration is a risk to measure and manage, rather than an automatic signal for intervention. While concentration is at its highest since the mid-1960s, driven overwhelmingly by AI-linked companies, it does not, by itself, mean the largest companies are overvalued or about to underperform. Unlike the dot-com bubble, many of today's market leaders are highly profitable, with strong cash flows funding capital expenditure.
Consequently, we recommend retaining core mega-cap exposure while building optionality to diversify if valuations stretch further or fundamentals decline. Investors should closely monitor the monetisation gap and the scale of circular and off-balance-sheet AI financing. Active management also has an important role as the next phase of AI adoption broadens beyond the hyperscalers, creating greater dispersion between winners and losers.
Furthermore, while many pension schemes may worry about concentrated equity indices, a significant portion hold a much larger exposure to just one borrower: the UK government.
Outright default is unlikely, but possible. Governments eventually shy from the political consequences of just printing money and ever escalating inflation. High inflation is itself a risk for pensioners on fixed incomes, and for those whose benefits have limited inflation protection. The UK's worsening fiscal position poses a concentrated risk for pensioners' purchasing power, even without a gilt default.
Often, gilt-based liability measures make these assets appear naturally self-justifying, as they reduce measured funding-level volatility precisely because liabilities are valued by reference to similar instruments. Trustees should look beyond relative risk and ask a simpler question: is the absolute exposure to a single sovereign still acceptable?
Chris Redmond is head of manager research at WTW
Since 2018, stock concentration has risen sharply
Equity portfolios with hundreds of holdings can still have concentrated exposures to a handful of systematic factors. In their 2018 paper, What's in Your Benchmark?, Madhavan et al. found that value-weighted indices' factor exposures were often dominated by just two or three risk factors. Their findings highlight that diversification across holdings is distinct from diversification across sources of risk.
Since 2018, stock concentration has risen sharply. The table below compares the same developed-market equity index at two points a decade apart. Forecast portfolio risk is virtually unchanged, but this masks a marked increase in absolute risk concentration, particularly from stock-specific risk. The index is now heavily exposed to a small number of companies that can disproportionately influence outcomes through earnings misses, product delays, or other idiosyncratic events. These are now effectively index-level events.
Compounding the challenge, the index's largest holdings are also among its most volatile, with average volatility nearly doubling to 42%. A decade ago, the top ten stocks were relatively defensive large caps; today they are dominated by more volatile names. Simply capping weights can reduce exposure to the largest holdings, but each unit of active weight in these stocks generates more tracking error than a comparable position in lower-risk names.
Effective N: Asset and forecast risk concentration
Source: Keyridge Asset Management. Note: Inverse Herfindahl measure: higher values indicates broader diversification
Managing concentration risk requires balancing trustees' and members' risk appetite against the tracking error incurred by deviating from the benchmark. A clear tracking-error budget provides the framework for portfolio design. Concentration is unlikely to be the only objective, so schemes should also consider their preferred portfolio characteristics, whether income, exposure to value, quality or multiple factors, or a home-market tilt. These preferences may naturally reduce concentration while better aligning the portfolio with scheme objectives. A quantitative framework, supported by modern risk tools, provides the most effective way to assess these trade-offs and control unintended exposures.
Alan Duffy is head of systematic investment strategies at Keyridge Asset Management
Concentration does not automatically make an investment unattractive
Market concentration does not automatically make an investment unattractive. Trustees should understand how benchmarks are built and how exposures may evolve. Cap-weighted index investing has served investors well, but sharp reversals can potentially amplify reliance on a small group of companies or one sector. Schemes need not choose between embracing AI and avoiding it: active managers can invest across its value chain and identify opportunities elsewhere. Complementary managers can diversify investment ideas and sources of return.
For DB schemes, equities make up around 15% of assets on average, so equity concentration is only part of the wider portfolio risk picture. Concentration may also arise in buy-and-maintain credit portfolios, often invested in sterling investment-grade bonds from a limited universe. Against an estimated £500bn sterling IG market, DB schemes may be holding up to £200bn in B&M portfolios. And this issue isn't going away. In Russell Investments' 2025 survey, 24% of respondents expected to add investment-grade credit in the next six months [see chart ], while 17% and 14% expected to reduce developed and emerging market equities respectively over the same period. To avoid concentration risk adversely impacting them, trustees should ensure exposures are monitored across their entire portfolio.
Which asset classes do you plan to add exposure to over the next six months? 
Source: Russell Investments, October 2025. Note: Respondents were asked to select all that applied
DC investors commonly hold more than half their assets in equities. Longer horizons can support greater tolerance for short-term volatility, but do not remove concentration risk. Diversification across asset classes, such as into private markets for those with long time horizons, regions and sectors, and taking an active approach, can reduce reliance on a handful of companies or a single market outcome.
Simon Partridge is head of EMEA OCIO at Russell Investments
Concentration risk not simply a question of index weights
From a capital cycle perspective, concentration risk is not simply a question of index weights but of where capital is flowing and how markets are pricing risk. Recency bias and a shift to passive strategies have led us to the point where most portfolios are less diversified than ever.
In emerging markets (EM), the rate of change of technology sectoral dominance in the last 18 months has been dramatic. Ten years ago, the top 10 stocks within Global EM indices accounted for 29% of index weight, with the top three representing 10%. Today, the top 10 account for 45%, while the top three alone are over 30% of the index. Eight of the largest companies are semiconductor-related businesses. EM is now a highly thematic asset class, resulting in a complete collapse in breadth at the index level (see chart).
The % of constituents outperforming the MSCI EM index
Source: Factset, Marathon. Note: The chart shows the % of constituents outperforming the MSCI EM index. The 12 month rolling returns for the stocks and the index are measured in USD terms.
On a trailing 12-month basis, fewer than 20% of stocks within the index of over 1,300 companies have outperformed, representing the most concentrated market environment in 25 years of data. In Q2 26, the EM index returned over 22% in absolute US dollar terms, and yet every sector barring technology underperformed the broader market.
For schemes seeking to mitigate concentration risk, the answer lies in investing across the breadth and depth of the EM opportunity set, focusing on companies benefitting from idiosyncratic capital cycles, such as asset-heavy, inflation-protected real asset businesses. Capital cycles are characterised by strong supply-side dynamics, where capital has exited certain industries and subsectors, creating compelling valuations and attractive levels of absolute return opportunities. This approach avoids some of the correlation risk that is present at the broader index, providing access to a genuinely differentiated range of return drivers.
Alex Duffy is an emerging markets portfolio manager at Marathon Asset Management
Systematic strategies offer solutions to mitigate this risk
With a significant proportion of companies in equity indices exposed to the AI and technology theme, market concentration is very high, particularly in the US and in the emerging markets: "The Magnificent 8" account for more than 25% of the MSCI World, while in emerging markets three companies alone account for 27% of the index (see chart).
Price performance of tech stocks leads to exceptional market concentration
Source: Quoniam Asset Management
This creates two distinct risks: losses in the overall market driven by a handful of companies and benchmark underperformance when diversifying away from them. Addressing one does not automatically mitigate the other.
For pension schemes concerned about market concentration risk, and their exposure to it, systematic strategies offer a range of solutions to mitigate this risk, dependent on an end-investor's risk appetite.
Enhanced index strategies aim to deliver consistent outperformance over the benchmark with low tracking error. To avoid systematic underweighting of mega-caps, they diversify active risk across numerous small deviations from benchmark weights.
Active extension approaches offer an alternative for investors seeking greater alpha potential. These strategies increase active money while targeting benchmark-like risk levels by allowing short positions to finance additional long positions. Unlike high-conviction strategies, they do not rely on underweights in index leaders to fund active positions in other market segments.
For investors prioritising lower absolute risk, minimum-volatility strategies are a solution. By combining stocks with low covariance, these strategies aim to minimise overall portfolio volatility, targeting risk levels that are significantly lower than the benchmark. Their benchmark-agnostic construction usually results in underweighting mega-caps, which is beneficial when market concentration unwinds. These strategies have historically demonstrated resilience during market downturns while retaining the potential to participate in broader equity rallies.
Dr Volker Flögel is chief investment officer at Quoniam Asset Management
