Ollie Smith: Now, mention the word concentration and your thoughts might turn naturally to the US and the Magnificent Seven, but there's a story to tell about concentration in the UK Michael Born from our manager research team joins me now to discuss all that and more. Michael, thanks for your time. Just starting with the basics, what's the situation with the US. and concentration?
Michael Born: Yeah, sure. So, I mean, it's something where you've seen a lot of reporting, talk of the Magnificent Seven and so forth, that the market has become notably more concentrated in the U.S., but you've also seen that throughout markets across the world. So, you're seeing these top stocks primarily in technology-oriented sectors really becoming a larger part of the index and performing so well they've been really driving the market.
OS: Sure. But there is, as I said, there's a story to be told here about the UK, which has its own concentration story and its own concentration risk. Tell me more.
MB: Yeah, that's right. And I mean, the UK has always been really a concentrated market. It's had those big mining and bank stocks, the likes of HSBC, Anglo, et cetera, kind of at the top of the food chain for some time. So, it's interesting, but even though these are not stocks which have benefited from any growth tailwinds, they're very value-oriented. So, in spite of concentration actually coming down over the last 20 years or so, the UK is actually still more concentrated than the US market.
OS: Interesting. And what, if I may ask, is the impact on fund managers who are trying to navigate that world and produce alpha for their investors?
MB: Yeah. So, I mean, we've spent quite a lot of time in manager research looking at concentration across various markets, actually. And it's interesting that you've really had a style kind of effect. So, as I mentioned earlier, in the US, you've seen growth stocks dominating there. And because there haven't been those sort of growth tailwinds, more value-oriented markets like Japan and the UK. have actually, it's fallen, but you're still seeing that kind of size effect where the top companies are driving the market. So, I mean, what does this mean for fund managers? It makes it exceptionally challenging, to be honest, because it's basically, it's almost impossible to outperform without holding the top stocks. So, you've seen that in the US anyway, really, it's all been about what do you hold Nvidia NVDA? Are you overweight as to how you're performing? And to some extent, that's really been true in the UK. Only 30% of the stocks that haven't been in the top 10 have actually outperformed the index since 2022.
OS: Sure. And surely, though, with depressed valuations in the UK, there are still opportunities out there, are there not? There's some optimism to be had, do you think?
MB: Yeah, absolutely. I mean, also, I should say, you know, having running up concentration isn't necessarily a bad thing for investors. But yeah, you know, in the UK, there are lots of reasons to be optimistic as we've been kind of talking about this year.
OS: Michael, thank you so much. That's great. For more on concentration and indeed concentration risk in the US and the UK, check out Morningstar's editorial websites globally. Until next time, my thanks again to Michael, I've been Ollie Smith for Morningstar.
