Key insights
- Major global pension funds are reducing their US equity holdings due to concerns over high valuations and the market's concentration in AI-related companies. Funds from Australia, Canada, and the UK are now underweight US equities relative to benchmarks. This trend is driven by the belief that US market fundamentals are over-priced, prompting a search for diversification and better risk-reward outside of megacap technology stocks.
Investing.com -- Major pension funds managing hundreds of billions of dollars have cut their holdings in US stocks as concerns grow over high valuations and the heavy concentration of artificial intelligence companies in the market.
Pension schemes including Australia's $260 billion Australian Retirement Trust, Canada's $388 billion La Caisse, and the UK's £45 billion People's Pension now hold US equities below global benchmark levels, according to Financial Times research.
A small group of technology and AI-focused companies including Nvidia (NASDAQ: NVDA), Alphabet (NASDAQ: GOOGL) and Microsoft (NASDAQ: MSFT) have driven the S&P 500 index higher in recent years, pushing US market concentration to record levels.
Jimmy Louca, a senior portfolio manager at Australian Retirement Trust, said the fund reduced its US equity position this year relative to the MSCI World benchmark. He said valuations of "the AI sector and US equities are a little bit stretched," which led the fund to become underweight US equities versus its strategic asset allocation.
"When you look at where we are in the cycle, we assess those US fundamentals as being more than fully priced," Louca said. "So the market's moved more than what fundamentals would justify. So you need diversification around that."
Consultancy Marsh reported last month that more global institutions plan to reduce US equity exposure than increase holdings. Of 430 entities surveyed with combined assets exceeding $5 trillion, one-third planned to cut US equity exposure over the next 12 months, double last year's level.
More than one-third of the S&P 500 consists of large-cap companies tied to the AI investment cycle, creating concentration risk.
Vincent Delisle at La Caisse said US exposure remains the fund's largest, but "we're diversifying outside of the megacap technology stocks. Valuations can be a trap right now, sustainability of earnings growth should be a focus. Outside of technology is where we find the best risk-reward opportunities."
The US now represents 49% of People's Pension main fund's global equity exposure, down from 53% at the end of last year, below the MSCI ACWI index's 64%.
Dan Mikulskis, chief investment officer at People's Pension, said concentration risk "does merit real discussion" given the current scale of the US market in global portfolios and the rise of passive investing using indices.
Denmark's ATP, which oversees more than $100 billion, is monitoring valuations and concentration risk. Chief investment officer Mikkel Svenstrup said current valuations imply very strong earnings growth expectations over coming years.