Beware ‘unconscious concentration’: Rethinking diversification

Diversification is one of the most familiar ideas in investing. But looking around at the concentration risk that now defines large parts of today’s market, it is also one of the ideas most in need of a rethink.

The principles of diversification are straightforward and generally well understood by investors: spread risk so that no single setback can do too much damage.

But equity markets are increasingly shaped by a narrow set of market leaders and crowded positions. That makes genuine diversification harder to apply than many portfolios suggest. A portfolio can appear diversified on paper yet still behave like a concentrated bet in practice.

Genuine diversification is less about how many holdings sit in a portfolio than about what is driving them. A portfolio can span geographies and asset classes yet still be pulled by the same forces. When that happens, apparent breadth can give way quickly once conditions change.

A global portfolio can still be a crowded trade

One common mistake is to assume that just because a portfolio contains global equities it is naturally diversified.

The MSCI All Country World Index ranks among the most diversified major global equity benchmarks, yet it too clusters heavily around similar themes. That is a reminder that what appears to be a globally diversified portfolio can still deliver concentrated exposure to one market, one part of the market and one set of expectations.

As at 31 March 2026, US stocks made up 63 per cent of the index. Mega-cap companies accounted for 76 per cent. Information technology and communication services together represented over a third of the index. The so-called “AI Eight”, Nvidia, Microsoft, Amazon, Meta, Broadcom, Alphabet, Oracle and Palantir, made up close to 17 per cent.

That level of concentration may feel comfortable while the tailwinds blow, but it also leaves portfolios increasingly exposed should the winds change. This kind of unconscious concentration is one of the less appreciated risks in markets today.

In uncertain markets, diversification by behaviour matters more than diversification by name. Investments should be spread across regions, sectors, and economic drivers. Some of our most compelling investment opportunities barely register in the index.

In fact, only 8% of the Orbis Global Equity Fund (by weight) overlaps with the MSCI All Country World Index (as of 31 March 2026). For instance, attractive opportunities exist beyond the US, including UK industrials, biotechnology, and select Asian technology and consumer businesses.

The managers deliberately construct the portfolio to hold a few diverse, high-conviction ideas that produce idiosyncratic returns.

Starting valuations matter

At Orbis we focus on fundamentals and believe the value of a business ultimately rests on its future cash flows.

This valuation discipline is key to making sense of today’s market. Orbis’ analysis shows that as at 31 March 2026, global stock markets have rarely been more expensive on almost every long-term measure. Global markets now sit at their 91st percentile relative to the past 50 years, meaning they have only been more expensive seven per cent of the time.

That does not tell investors what will happen over the next six or 12 months, but it does offer a cautionary note. When valuations reached similar levels in the past, the decade that followed delivered modest and sometimes disappointing returns.

The gap between the US and other markets is especially notable. As of 31 March 2026, the US cyclically adjusted price-to-earnings ratio sat at around 35 times. Emerging markets traded closer to 16 times. Markets such as Japan and the UK traded on much lower multiples still.

That does not mean the US cannot continue to perform well, but it does suggest that prices already reflect a great deal of optimism. By contrast, value can still be found in areas of the broader market that has yet to fully appreciate.

Valuation discipline always shapes Orbis’ positioning. But some points in the market cycle have produced stark differences. These include avoiding Japan at the height of its bubble in 1991, favouring value shares during the late 1990s technology boom, and investing early in areas such as semiconductors.

By positioning the portfolio away from the crowd when valuations warranted it, Orbis sought to avoid some of the market’s most crowded excesses while uncovering opportunities the market was still overlooking or undervaluing.

The lesson is simple: when valuations are stretched, caution matters; when they are depressed, opportunity often follows. Starting valuations remain one of the strongest guides to future returns.

Diversification is not just geographic

Confusion about what constitutes genuine diversification can happen when investors think too simplistically about diversification.

At Orbis, genuine diversification starts with doing something different. The team grounds every investment in valuation discipline, builds the portfolio selectively one business at a time, and stands apart from consensus when valuations warrant it.

For readers interested in how that approach translates into portfolio construction, Orbis’ whitepaper, Rethinking Genuine Diversification, explores the hidden concentration in global indices, the risks of style and regional crowding, and where a more selective, differentiated approach may uncover better long-term opportunities.

Legal disclaimer: For financial advisers and wholesale clients only. Past performance is not a reliable indicator of future results. This is not financial advice and does not constitute a recommendation to buy, sell or hold any interests, shares or other securities, or to adopt any investment strategy. This represents Orbis’ view at a point in time and we may take the opposite view/position from that stated. This is because our view may change as facts or circumstances change.