Big tech concentration may not be as risky as investors think

The stunning success of US-based megacap technology companies has led to increasing concentration within large cap US and global indices and investors and media commentators increasingly cite this as a concern. However, according to the Loomis Sayles Growth Equity Strategies team, superficial measures of concentration and diversification can be misleading and investors should dig deeper to better understand the level of risk they are taking on.

The US stock market has driven much of global equity growth in recent years. Led by the mega-cap technology stocks, and fuelled by innovation and the potential of AI, the USA has extended its lead as the preeminent global equity market. The S&P 500 was up more than 20% in both 2023 and 2024 and after a short dip early in 2025, the rally has continued. The US equity market is now worth more than 60% of global equity markets, the highest ratio since the 1960s¹.

While the incredible success of the megacap tech stocks has been welcomed by investors in US stocks it has also led to an increasing concentration in US and global large cap indices which is worrying some investors.

Is concentration bad? Not always.

Concentration is almost universally acknowledged as a negative by investors. Concentration is the opposite of diversification and diversification, the theory goes, reduces risk and improves long-term returns. On the surface this appears to be self-evidently true. If your investments are overly concentrated in a small number of stocks, or one asset class, one industry sector or one geographical area then there appears to be an increased risk that an external shock will affect all of these investments at the same time and so give you a greater chance of negative returns.

However, what appears to be the case on the surface is not always true when you dig deeper according to Hollie Briggs, Head of Global Product Management for Loomis Sayles’ Growth Equity Strategies (GES) team. The Team believes that the unintentional concentration investors receive when buying an index like the S&P500 is very different to the deliberate concentration that skilled investors achieve, and there are concrete steps investors can take to reduce concentration risk while retaining exposure to the exciting potential of US growth stocks.

There are two main concentration concerns investors have. Large cap US and global indices are:

• Too concentrated in too few stocks.
• Too concentrated in the technology sector

Are markets too concentrated in too few stocks?

It is true that US and global large cap indices are more concentrated now than at most other times throughout market history. According to the Financial Times it has ‘never been more concentrated². However, as Hollie points out, it’s important to draw a distinction between unintentional concentration and intentional concentration, what she calls ‘active concentration’:

“If you have passive exposure to a cap-weighted equity index then as stock prices rise, and short-term investors chase the upward momentum, your portfolio becomes more concentrated in these stocks. For passive investors who bought exposure to a cap-weighted index believing it offered a diverse range of investments this can increase downside risk because their investments become unintentionally more concentrated in fewer stocks.

I would contrast this with active concentration, which is where investors selectively choose not only the stocks they own, but also the size of each stock position – and thereby concentration – based on long-term valuation.  This is what we do in our strategies. We deeply examine each company’s fundamentals to ensure it meets specific criteria and then calculate our estimate of its long-term intrinsic value. 

We only buy a company’s stock when it is trading at a significant discount to our estimate of intrinsic value and we also build in a margin of safety in order to actively manage downside risk. We require at least a 2:1 anticipated upside-to-downside, reward-to-risk opportunity. In short, valuation drives the timing of all of our investment decisions and the stocks which we have the highest conviction in, those which we believe have the biggest discount to intrinsic value, have the largest position sizes in our portfolios. Over time, if the stock’s share price rises toward our estimate of intrinsic value, positive returns are generated and we then gradually reduce our position size.

When this process is implemented correctly it reduces the risk in a portfolio as we believe can be seen by the success of our strategies over the last 20 years.”

Hollie also believes that holding a greater number of stocks does not necessarily mean that a portfolio is less risky:

““In 2010, a landmark study by Citigroup³ showed that a portfolio of 30 stocks was able to diversify more than 85% of the diversifiable risk. The diversification benefit of adding more stocks to the portfolio declined significantly as the number of stocks increased. For example, adding 70 more stocks to a 30-stock portfolio improved diversification benefits by just 9%. Further, a greater number of names can potentially mask material risk stemming from a high degree of concentration in a handful of securities. On March 31, 2024, the Russell 1000 Growth index held 400 names, but 21% of it was in just two holdings, Apple and Microsoft.”

Focusing on sectoral concentration is often unhelpful, and can be misleading

Whether US and global large cap indices are too concentrated in the technology sector is missing the point according to Hollie. She believes that judging diversification by sector is too simplistic and can in fact mask high underlying correlation between stocks in different sectors that are nonetheless impacted by the same fundamental drivers of risk and return, which can cause their stock prices to move in step together.

“In 2022 you could have had a one-hundred stock portfolio that appeared well diversified across sectors such as information technology, healthcare, communication services, and financials – but if the underlying holdings were all outsized beneficiaries of the pandemic lockdown, your portfolio contained far greater risk than met the eye.”

Instead of looking at diversification by sector, the GES Team analyses and understands the underlying fundamental business drivers of each company as part of its risk management and portfolio construction process.“Risk management is an integral part of our investment process, not a separate overlay or optimisation process. As part of the bottom-up valuation analysis for each company we identify the primary business drivers that each business is exposed to. We make sure that we never have more than about 20% exposure to any one business driver.

We seek to invest in business drivers that are imperfectly correlated because the positive impact of one may offset the negative impact of another. For instance, it makes intuitive sense to us that growth in e-commerce bears little relation to the demand for genetic testing. However, we also substantiate that intuition by analysing cash flow correlations and share price correlations among our holdings over the 10 years prior.”

At the end of September 2025, 20.25% of the GES Team’s Global Growth strategy was in the Information Technology sector, compared to 26.4% of the MSCI World, and Hollie says it is well diversified according to their business driver analysis..

"We own 8 technology companies and there are 6 different business drivers among them. When we look at correlation statistics among these business drivers they are similar to the correlation among all of the stocks in the MSCI World Index. This shows that with a portfolio of around 44 stocks we are achieving a similar correlation to the MSCI World as a whole, however the downside risk of our portfolio should be lower as we are making deliberate decisions as to the size of each holding in our portfolio, rather than letting the market decide. As a whole, our Global Growth strategy is diversified across 39 different business drivers.”

Investors can optimise risk and reward through active concentration

Simple measures of concentration and diversification, like number of holdings, or sectors and geographies, can be useful tools for investors, however they fall short of giving a complete picture.

More detailed analysis of the stocks, like through business driver analysis, can give investors deeper, truer insight into whether their investments are sufficiently diversified and thereby better manage concentration risk. 

“Business driver diversification has been core to our process for nearly two decades and we believe it is of particular importance in today’s age of index concentration. However, achieving effective business driver diversification requires a deep understanding of all portfolio holdings and we doubt whether this is possible in portfolios with 70, 100, or 150 holdings”, comments Hollie.

Also, Hollie and the Growth Equity Strategies Team at Loomis Sayles believe that it’s important not to confuse ‘measuring’ risk with ‘managing’ risk:

"We believe defining risk in relative terms obfuscates the fact that the benchmark itself is a risky asset. The widespread use of passive index investing and other strategies which do not include valuation as part of the decision-making process can create mispricing opportunities for active, long-term-oriented, valuation-driven managers like us. Capitalising on these opportunities requires a disciplined process and a patient temperament.

If you examine the nearly 20-year history of our growth strategies versus our peers, the group of managers that performed better than us in down markets significantly underperformed our strategy in up markets. Whereas the group of managers that outperformed us in up markets significantly underperformed our strategy in down markets^4.

We think that this makes our strategies a good choice for long-term investors that would like exposure to the significant growth potential of US and global equity markets. Both fiduciaries and investors have told us they welcome not having to choose between ‘offense’ and ‘defense’ in their growth equity allocations.