Is it right to have 25% of DC pensions invested in just seven companies?

The US chipmaker's valuation growth has been stellar – with it reaching a market value of $1trn (£758bn) for the first time in June 2023 and $4trn (£3.03trn) just three months ago, all on the back of the AI-boom.

Nvidia's value is now about half the size of Europe's entire benchmark equities index, the Stoxx 600, and dwarfs all 350 constituents of the FTSE 100 and FTSE 250 indices, whose combined market value is about $3.4trn (£2.6trn).

Nvidia's milestone comes just days after both Microsoft and Apple passed the market cap level of $4trn (£3.03trn).

Together, the so-called magnificent seven – Alphabet (the parent company of Google), Amazon, Apple, Meta Platforms (the parent company of Facebook, Instagram and WhatsApp), Microsoft, Nvidia and Tesla – currently have a market capitalisation of about $22trn (£16.7trn).

Comparators are pretty meaningless here, but, according to the International Monetary Fund, the GDP of China, the world's second biggest economy, is $19trn (£14.4trn), and the GDP of the next five biggest economies – Germany, Japan, India, UK and France – total around $20.7trn (£15.7trn).

But why does this matter to defined contribution (DC) schemes and their members?

The majority of DC assets are still invested in passive global equity vehicles. This means they will track indices such as the MSCI World Index, particularly in the growth phase of investment.

Here lies a potential problem though. At the current market capitalisations, the magnificent seven currently make up around 25% of the MSCI World Index. To be clear, one quarter of the money in a fund tracking this index will be invested in just seven companies.

It doesn't look much better if you look a bit more broadly either. A good number of the largest non-‘Mag7' companies by market capitalisation in the MSCI World Index have weightings in excess of 0.5% of the index, meaning that a further 15 or so firms make up an additional 10% or so of a portfolio.

The remaining two-thirds will be spread over (and, again, not equally) between around 1,300 other companies across some 23 developed markets.

This concentration of investment also plays out when you look at the country weights of the MSCI World Index – which, according to the index's September update, had 72.45% in the US, against 5.42% in Japan and 3.57% in the UK.

Source: MSCI

Of course, not all growth phase DC default funds invest in global equities, but a good majority do. And, of those that do commit most of the growth phase default assets to global equities, not all benchmark against the MSCI World Index, or indeed have 100% of assets in such a strategy.

But, no matter how you look at it, a substantial portion of DC default investment is concentrated in just a handful of companies and largely tilted towards the US.

Which brings me back to the original question to trustees and those overseeing such DC defaults – is it right to have such a large proportion of DC pension investment concentrated in such a small number of companies?

Jonathan Stapleton is editor of Professional Pensions