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Market concentration: What could it mean for DC default strategies and member outcomes?
At a glance
- DC defaults should aim to capture long-term growth opportunities without member outcomes becoming heavily reliant on a handful of US mega-cap equities
- Portfolios should have independent sources of return
- Other assets must justify potential diversification benefits against cost, liquidity, and governance considerations
Market concentration is one of the key characteristics of today’s equity markets – and has therefore become a growing consideration for strategic asset allocation in DC defaults. In the US, the 10 largest companies account for almost 37% of the MSCI US Index.1 Because the US represents almost two thirds of the global MSCI ACWI,2 these companies also exert a substantial influence on global equity returns. Nine of the world’s 10 largest companies are US-listed and together represent more than a fifth of the MSCI ACWI’s market capitalisation.
Matt Brennan, head of asset allocation, considers how defaults can pursue growth without becoming overly reliant on a narrow group of mega-cap stocks.
Building success
Companies with sustained earnings growth, strong balance sheets and durable competitive positions attract investor demand and can outperform over the longer term. As their index weights rise, passive equity funds tracking market-cap-weighted indices reinforce this success. Where the addressable market is large – as with Apple in smartphones or Microsoft in operating systems – strong performers can become market giants whose share-price movements heavily influence the wider market.
Market concentration in the US has increased as technology giants have tapped into AI-related strength. Positive expectations surrounding this growing field have propelled their share prices higher and created several new market leaders.
Why the issue could intensify
With AI-related companies Anthropic and OpenAI potentially undertaking large IPOs, there is likely to be further focus on technology and communication services shares and their substantial slice of the equity market. Further earnings strength among leading AI and broader technology companies will also likely reinforce that attention.
The position of the large tech stocks is, of course, not guaranteed. Valuations will quickly be reassessed if growth disappoints and AI-related capital expenditure proves harder to justify. Higher interest rates, regulation, supply-chain pressures, or market saturation could also constrain this segment’s leadership.
Identifying concentration within the default
Concentration in a single market is not automatically a cause for concern: it often reflects competitive advantage, strong earnings, and attractive returns on capital. Nevertheless, if market-cap-weighted exposure creates unintended reliance on a small number of companies or a single growth driver, pension funds need to understand and mitigate those risks.
Even a workplace pension can look diversified across equity holdings and regions yet potentially remain overly exposed to the same small group of mega-cap stocks. For example, global, growth, large cap, technology, and thematic fund allocations could all hold the same AI-related names. Default asset allocators therefore must look through fund labels and holdings to identify the portfolio’s true economic exposures and assess how they could affect members in a market pullback.
The challenge is to retain enough exposure to key long-term growth themes without allowing them to dominate member outcomes. Asset allocators should carefully diversify growth drivers and reinforce portfolios with thorough stress-testing and analysis of the expected risk-return tradeoff.
Diversifying the drivers of equity returns
Initial and ongoing portfolio monitoring and assessment should identify common drivers across equity funds, test how correlations may change under different market conditions, and assess what combination of assets can improve expected member outcomes after cost considerations.
A global index provides broad exposure, but market concentration can leave returns heavily dependent on a limited set of drivers. The inclusion of regional, thematic, style-focused and smaller-company allocations can help diversify equity returns and partially offset concentration biases, although these will introduce different risks and performance challenges.
Broadening return sources
Bonds will usually remain the default’s main defensive diversifier, providing income, liquidity, and potential protection against growth shocks. Government bonds, investment-grade credit, high-yield funds, and general bond funds can play distinct roles, so duration, inflation and credit risk need to be carefully calibrated– particularly as members approach retirement, when the defensive role of bonds becomes most important. However, as leading technology companies issue more debt to fund AI investment, corporate bond allocations could become exposed to the same mega-cap technology growth drivers. This risk overlap also needs to be understood by multi-asset managers and mitigated.
Private markets, real estate, infrastructure, and other alternative assets can broaden a default’s return opportunities by introducing new performance drivers with low correlation to dominant equity exposures. Certain infrastructure assets, for example, can be tied to regional economic cycles, offer income generation, inflation protection, or provide greater long-term visibility through regulated returns. Any additional assets must meet the default’s liquidity requirements and improve diversification. Selection, manager screening, valuations, implementation risks, and generally higher costs should all be assessed by asset allocators to ensure that these assets deliver net benefits to members. Their role will also vary across a member’s journey, so they must be allocated carefully within the glidepath.
Managing risk across the glidepath
DC defaults aim to build resilient retirement pots over the long term rather than outperform global equities in every period. No one can know which companies, industries, themes, regions, or return drivers will lead markets throughout a member’s working life and retirement. While some drivers may dominate for prolonged periods, a broad range of return drivers is more likely to support outcomes across accumulation and decumulation.
The balance between growth and protection should reflect members’ investment horizons, contribution patterns, tolerance for volatility and exposure to sequencing risk. Longer horizons can support meaningful equity exposure during early and mid-career accumulation, but this should reflect deliberate portfolio design rather than index construction alone. As retirement approaches, the glidepath should shift progressively towards capital preservation, liquidity, and flexibility.
Stress-testing can show how shocks – including a reversal in US mega-cap leadership, higher bond yields, or a liquidity squeeze – might affect different member cohorts. This would help asset allocators assess whether the default’s risk profile remains appropriate at each stage of the glidepath.
Improving DC outcomes is therefore less about avoiding concentrated equities than combining an appropriate balance of return and risk drivers. A robust default should remain resilient as market conditions and leadership change.
Key takeaways
- Assess underlying exposure to market leaders.]
- Stress-test concentration risks across member cohorts and at each stage of the glidepath
- Add new sources of return only where the expected member benefits justify additional costs and constraints
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*All index data sourced from FE Analytics and shown in total return sterling, unless stated otherwise.
1 MSCI USA Index (USD) Factsheet, as at 31 August 2026
2 MSCI ACWI Index (USD) Factsheet, as at 31 August 2026