26th June 2026
Much has been written about the Artificial Intelligence (AI) trade, the narrowness of recent stock market returns and how this has exacerbated the issue of index concentration. This is true in the US but also in Asia and Emerging Markets where just 3 AI related stocks (TSMC, Samsung Electronics and SK Hynix) now account for over a third of MSCI AC Asia ex-Japan.
Current levels of concentration are unprecedented and raise deep questions for active managers which strike at the heart of established investment principles and philosophies. Many have spent years touting their credentials as unconstrained, benchmark agnostic investors who wear conviction like a badge of honour. Admirable commitment to this cause becomes more difficult, however, when a handful of behemoths explain the entirety of a market’s returns and when the impact of not owning said positions might hide otherwise good stock picking elsewhere in the portfolio.
A stunning hit rate can be completely swamped and upside-downside capture ratios become distorted. Maintaining a high information ratio (a widely regarded measure of manager skill), becomes harder as breadth decreases and index concentration increases due not only to the impact of the numerator (portfolio returns minus benchmark return), but also to the denominator (tracking error) which shifts higher when active positioning increases. For resolutely active managers, increased index concentration makes this latter feature a near inevitability.
Against this backdrop should an ‘unconstrained’ active manager stick to their investment process and portfolio construction principles accepting bouts of marked underperformance as a consequence, or should they mitigate risks regarding performance analysis and adopt a more ‘relative’ mindset, moderating active weights for large index constituents to allow their stock picking skills to continue shining through? The question acquires additional nuance when the handful of stocks dominating an index are effectively all a play on the same theme (i.e. AI). Things get harder still where the theme in question is complex, fast moving and has an unusually broad range of possible outcomes, and where having conviction in that theme requires high levels of technical knowledge that might be beyond that reasonably expected from generalist equity investors.
Balancing these considerations is not easy and we suspect there are a good number of active managers, whether motivated by career risk or humility, that have chosen option one and who’s top 5 holdings don’t currently reflect their highest conviction ideas. We also know there are a good deal of managers who are sticking to their process and remain focussed on risk adjusted absolute returns. This requires a high pain threshold both for the manager and the underlying fund investor, and we recognise there is not a ‘one size fits all’ correct answer here. For more benchmark aware mandates, for example, a manager moving to neutral weight positions for large index constituents becomes a necessity in the current environment to maintain tracking error and to manage performance divergence.
When managing the Hawksmoor Funds, we concentrate on the stated objectives of each mandate (positive real returns net of all costs) which tends to result in a focus on absolute returns rather than relative. This inclines us towards managers with a similar mindset which often imbues them with a natural resistance to style drift and a willingness to continue executing the tried and tested investment process regardless of how horrible short-term underperformance might be.
When assessing manager performance, it’s more important than ever to consider market backdrop and style leadership, with the current situation of extreme concentration raising questions about how the broader industry should be judging active managers. One clear example of the pitfalls of concentrating solely on benchmark relative returns stem from the UCITS rules which cap maximum position sizes at 10%. It’s impossible for an active manager at the helm of a UCITS vehicle to express an ‘overweight’ view on a stock like TSMC which today accounts for 14.3% of MSCI AC Asia ex-Japan, but sure enough lots of fund investors will be assessing that manager with reference to that index (it’s even worse for a global tech specialist where Nvidia, Apple and Microsoft all exceed 10% and together account for 51% of the index).
As Ben C discussed in our blog from a few weeks ago (here) the corollary of narrow breadth and the sucking noise in equity markets as capital flows into AI related names, means lots of high-quality businesses are going under the radar resulting in some compelling valuations for active managers to exploit.
We do not know if the AI heavyweights will continue to dominate equity markets. We do, however, know that like any investment this is not a riskless, one-way street and that in many cases valuations and expectations for earnings growth are already pricing in a pretty rosy future. This view, the opportunities elsewhere, and our aim of building portfolios that are resilient in a range of scenarios mean we won’t be putting all of our equity eggs in the proverbial Technology basket. Passive investors don’t have the luxury of this choice, however. Funds that track broad US and Asian markets, for example, have 40% and 50% in the Information Technology sector respectively and top 5 holdings which account for 28% and 38% of portfolio totals. The godfather of passive investing, Jack Bogle, saw diversification as one of the key benefits of the index tracking approach, but whether such vehicles are able to fulfil this role in today’s environment is highly questionable.
Narrow breadth and index concentration are forcing active managers to rethink how they construct portfolios and fund investors to consider how active funds should be analysed and judged. It is also exacerbating the risks of passive investing. There are as many questions as answers, but this team for one will be sticking to our knitting and backing underlying active managers doing the same, delivering unconstrained, absolute return focussed portfolios in the process.
Ben Mackie – Senior Fund Manager
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For professional advisers only. This document is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”), the investment manager of the MI Hawksmoor Distribution Fund (“Fund”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. The Fund’s Authorised Corporate Director, Apex Fundrock Ltd (“Apex Fundrock”) is also authorised and regulated by the Financial Conduct Authority. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contain have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Hawksmoor, its directors, officers, employees and their associates may have a holding in the Fund. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC26719.
