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Alternative Market Briefing

TOBAM: risk concentration levels on US equities hitting 2008 levels

Monday, July 02, 2018

Bailey McCann, Opalesque New York:

A new analysis of US equities from French asset manager TOBAM suggests that risk concentrations are hitting levels not seen since 2008.

Driven by a small number of actors the so-called "FAANG stocks" - a group of mega tech stocks that have delivered significant relative outperformance amongst the MSCI US index, TOBAM says this growth is potentially dangerous for investors as high sector concentrations in equity markets translate into low levels of portfolio diversification..

"Fundamentally, market cap weighted portfolios are not diverse portfolios," says Christophe Roehri, global head of business development at TOBAM in an interview. "The influence of FAANG stocks in the index is outsized and investors may not be aware of just how concentrated their portfolios have become."

The potential risks are most prevalent in passive portfolios which are now extremely vulnerable to market corrections, Roehri says. But, the trend is similar in actively managed portfolios if managers have been riding the rally in the FAANGs.

"We are seeing a unique trend in the market," Roehri explains. "While equity market correlations have started to go down broadly over the past 18 months, they are actually going up for the FAANG stocks. So, while it may have been good to be exposed to these names it's time to start looking elsewhere or at least increase diversification."

Warning signs are ......................

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