January 06, 2026 | Institutional Perspectives | 5 min read

Three Strategies for Managing Concentration Risk in Global Equity This Year

Looking back, 2025 could be well summarized as a year dominated by volatile US economic policy, strong equity returns across regions, and narrow leadership in markets. In our conversations with clients, prospects, and consultants, market concentration in the global equity market, particularly in the US, was the most common concern. Over the year, many investment committees who use active management found themselves underexposed to the suddenly popular AI trade. Large tracking error against their equity benchmarks led many to question whether a passive approach may be better moving forward. On the other hand, clients who migrated to full or partial passive allocation to US equities in years past are now wondering whether active management should play a larger role moving forward to help them manage that concentration risk. 

Balancing on a narrow base

More than ever before, the future outcome of broad market performance is tied to a small group of stocks sharing a common theme – narrow upon narrow! Passive investment vehicles are built to track an underlying index, which is typically market capitalization-weighted (S&P 500 included). At every scheduled rebalance, the index is made up more of what has risen and thus naturally increasing its tilt towards the most popular stocks and themes, which is currently AI stocks. 

This structure is beneficial when winners keep winning, so 2025 was a year where a continued bet on AI-themed stocks was highly rewarded. In other words, momentum won, so a successful strategy was staying in or adding to the momentum play. However, if market leadership rotates or a star company doesn’t hit the market’s high expectations for it, performance will reverse quickly and drastically under the same momentum that drove it so high in the first place. In fact even just a plateau of performance could cause many investors to run for the exits, in turn causing a reversal of momentum.  This reduces any diversification benefits that investing in broad equity indices were intended to provide. Long-term history suggests that concentration cycles eventually mean revert and today’s market dynamics warrant very careful understanding, monitoring, and mitigation. 

Back in 2024, we wrote an article (“Talkin’ ‘bout your Concentration: The Risk of Passive ETF Investing”) which flagged concentration risks for investors who were passively invested in either US or global equity markets. This risk was only to be exacerbated over the course of 2025, with the top 10 weights in the S&P 500 Index (nine of which are AI-related holdings) ending the year at 39% of total, compared to 37% at the end of 2024. In addition, the geographical tilt towards US equities within the MSCI World Index continued its climb: it is now at approximately 72%, an all-time high. 

3 ways to reduce portfolio concentration

For clients who shared our concern over market concentration, we proposed a few approaches to managing this risk: 

1. Asset Allocation – Broaden Regional and/or Market Cap Sleeves to Underweight US Large Cap
   • At an asset allocation level, add size and regional tilts that diversify away from US mega cap stocks.
   • Complement your existing portfolio with large cap EAFE (International Equity), Emerging Markets, and/or US or Global Small-Mid cap (SMID). Investment risk (and reward) can thus be spread more across regions, market caps, and sectors. Adding regional and small/mid-cap equity exposure increases the weighting of smaller companies, lowers top 10 and US weight (in favour of Europe, Japan, EM) versus MSCI World, and reduces the sector concentration in Technology.
2. Consider a Core-Satellite Approach – Blending Active with Passive and Diversification through Investment Styles
   • Blend in actively managed Global Equity as satellites within an existing low‑cost passive core strategy. Include a value strategy to offset the growth-y nature of the US broad index and consider a growth manager with strong risk controls as well.
   • This approach continues to give broad market exposure, while active sleeves can trim oversized positions, add under‑owned regions, and rebalance when leadership narrows. The result is more balanced returns, less dependence on a handful of mega‑cap stocks, and greater resilience when market leadership rotates. Value-oriented strategies may place more emphasis on conservative valuation metrics and complement the portfolio with less headline-driven AI-exposure.
3. Consider Equal Weighted Options
   • A less common approach would be to invest an equal weighted passive option. Equal weighted indices keep the same constituents as the MSCI World Index or S&P 500 Index but assign each stock an equal weight at each rebalancing period. This construction contrasts against market weight and reduces the influence of the largest companies. 

At Leith Wheeler, we offer several strategies to help clients manage concentration risk, in a way that best fits their needs. Specific strategies include:

• Leith Wheeler US Equity Fund
• Leith Wheeler International Pooled Fund
• Leith Wheeler Global Equity Fund
• Leith Wheeler Emerging Markets Fund
• Leith Wheeler US Small-Mid Cap Fund

Core strategies such as the Leith Wheeler US Equity Fund, Leith Wheeler International Pooled Fund, and Leith Wheeler Global Equity Fund have served clients well on a standalone basis but they also work well as a blend of all three strategies (and in conjunction with a sleeve of passive investments). The Leith Wheeler Emerging Markets Fund and US Small/Mid-Cap Equity Fund are great complementary additions for clients looking to broaden regional and market cap diversification.

Manage for risk, not just return

For many (I’d venture, most) active managers, exercising investment discipline around AI exposures has led to underperformance in recent years against the benchmark (and passive alternatives). While relative returns have been challenged for the median active Global Equity manager, absolute returns for clients have remained robust. Our advice for clients is that as long-term investors, consider risk as a continuously forward-looking endeavour and be guarded against treating any short- or medium-term performance measure as more important than their true, long-term objectives. The ability to meet liabilities and long-term spending targets, or the avoidance of permanent impairment to capital should remain the key focus.

Market concentration goes beyond a headline. It’s a portfolio risk. Increasing market concentration contradicts the notion that passive investments are “well diversified” through the sheer numbers of companies held and “low risk” as it always performs in-line with one’s measurement benchmark (no tracking error). Low tracking error to a monitoring benchmark is not low risk, especially relative to the main goal of most funds. Goodhart’s Law states, when a measure becomes a target, it ceases to be a good measure. The risks of losing sight of the ultimate goals in favour of the continuously available monitoring metrics could not be more stark. For 2026, we believe that keeping investment objectives and risk discipline front‑and‑centre is more important than ever. When market leadership inevitably rotates, ensure that your Global Equity allocation remains resilient, diversified, and aligned to long‑term outcomes.

To learn more about how Leith Wheeler can help you and/or your organization:

• Contact Gary at garyw@leithwheeler.com
• Send us a note through our Let’s Talk page here
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