Concentration risk in markets

George Kessarios
Chief Economist & Fund Manager

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Apple is by far the most widely held stock in the world. Either directly or indirectly (via ETFs and Funds), almost all fund managers have some exposure to Apple in their portfolios. And because Apple and several other stocks are so widely held, when markets fall there is a plethora of these names that are sold. And when funds or ETFs have redemptions, fund managers sell what they can, not what they want. And if you have not noticed recently, Apple and the other top components of the S&P have been falling off a cliff.

At the same time, the 10 biggest companies by market cap in the S&P 500 Index comprise about 30% of the total market cap. This means there is the risk of high concentration in indexed products, and the market as a whole.

This was fine when markets were rising and no one questioned the valuation of the top components, but now after 7 weeks of lower lows, investors are asking themselves if Apple and many other stocks were worth what they paid for them.

But whether valuations were warranted or not, the risk of concentration remains. And this in turn might mean that, unless Apple and several other top constituents stop falling, it might be very difficult for the S&P Index to rally.

The bottom line is that there is much turbulence in markets today. In additional to supply shock issues, high energy, war, Central Bank tightening, we also have concentration risk. Obviously the more diversified investors are, the better, but when the top S&P 500 components are in most institutional portfolios (directly or indirectly), it’s difficult to avoid concertation risk at the current time. As Apple and other top brass components go, so will markets, for the time being.

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