Talaria warns S&P concentration erodes diversification

More than 90% of the world's investable assets now move in line with the S&P 500, prompting concerns that investors may be far less diversified than they believe, according to Talaria Asset Management.

Speaking in Sydney, Talaria co-chief investment officer Chad Padowitz said the concentration risk created by the dominance of a handful of US technology companies had spread well beyond equities into bonds, property, hedge funds and private assets.

"The proportion of the world's investable assets that move in step with the S&P 500 has risen from roughly 26% in 1995 to more than 90% today," Padowitz said.

"If you shouldn't put all your eggs in one basket, what do you do with one basket and one very big egg?"

Padowitz said investors increasingly believed that they were diversified because they owned multiple asset classes, when in reality many portfolios were exposed to the same underlying drivers.

"You think you potentially have a range of assets, but you've actually just got one bet," he said.

"The assumption of diversification via labels and asset classes are not really there."

"For many investors, what looks like a spread of risk has become a single bet," he said.

"An investor in global equity baskets today owns, in substantial part, a bet on a narrow set of companies tied to artificial intelligence."

While AI's long-term potential remains significant, Padowitz cautioned that markets appeared to be pricing in a level of certainty that history did not support.

"The transformative potential of AI is likely enormous, but the downside to assets linked to it could be too. That uncertainty is fundamentally at odds with the level of conviction now embedded in global asset prices," he said.

Talaria analyst Stefan Stoev said investors had become comfortable with concentration because most asset classes had performed strongly over recent years.

"You've had a period where most asset classes, not just equities, have done really well," Stoev said.

"I don't think people get worried when things backwardly look benign."

Padowitz added investors should instead focus on finding genuinely differentiated exposures.

"Real diversification is quite difficult, which makes it quite rare, which makes it quite valuable," he said.

"In a market priced at levels that have rarely, if ever, preceded attractive long-run returns, the path by which wealth moves through time matter as much as the destination."

In the current environment, Talaria said it favours shorter-duration holdings, companies with strong balance sheets and real assets, while also identifying trend-following and volatility strategies as among the few remaining areas that continue to offer genuine diversification benefits.