Global pension funds cut US equities over AI concentration risk

Global pension funds overseeing billions of dollars have reduced exposure to US equities, as concerns mount over lofty valuations and the high concentration of AI stocks in the market.

Large schemes including the Australian Retirement Trust (ART), which manages about US$260bn, Canada’s US$388bn La Caisse, and the UK’s £45bn People’s Pension are underweight global benchmarks, according to FT research.

A handful of big tech and AI-focused stocks including Nvidia, Alphabet and Microsoft have driven the S&P 500 index’s rally over the past few years, pushing US market concentration to an all-time high.

Jimmy Louca, a senior portfolio manager at ART, Australia’s second-largest superannuation fund, said the scheme had reduced its position in US equities this year relative to the MSCI World benchmark.

Louca said that while he did not expect a “dotcom-style bust”, the valuations of the “AI sector and US equities are a little bit stretched”, which had “caused us to become underweight US equities versus our strategic asset allocation.

“When you look at where we are in the cycle, we assess those US fundamentals as being more than fully priced,” he added. “So the market’s moved more than what fundamentals would justify. So you need diversification around that.”

Consultancy Marsh published a report last month that found more global institutions were planning to decrease their exposure to US equities than were seeking to increase their holdings.

Of the 430 entities surveyed with a combined total of more than $5tn in assets under management, a third planned to reduce US equity exposure over the next 12 months — double last year’s level.

“The concentration of a handful of technology names in headline US indices has made geographic exposure synonymous with sector and factor concentration,” Marsh’s report said.

More than a third of the S&P 500 is represented by large-cap companies exposed to the AI investment cycle, leading to concentration risk, experts argue.

Vincent Delisle at La Caisse, one of Canada’s biggest pension schemes, said that while its US exposure was still the largest, “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.”

He added that AI risk was now “the single most important factor determining how we want to position ourselves in equity markets”, and that even though diversification had been “penalised” because of tech stocks’ concentration in equity markets and their outperformance, “we believe diversification and patience are still warranted”.

UK pension funds have also been cutting their exposure to US equities. The US now accounts for 49 per cent of the global equities exposure of People’s Pension’s main fund, according to public factsheets, compared with 53 per cent at the end of last year, far below the MSCI ACWI index’s 64 per cent.

“Given the current scale of the US market in global portfolios and the rise of passive investing using indices, [concentration risk] does merit real discussion,” said Dan Mikulskis, chief investment officer. “Indices are not as diversified as they have been in the past.”

Other schemes such as Denmark’s ATP, which oversees more than $100bn, are closely monitoring valuations and concentration risk.

“Current valuations imply very strong earnings growth expectations over the coming years,” said ATP’s CIO Mikkel Svenstrup. “While that does not mean these expectations will not be met, it does leave equities somewhat more vulnerable to disappointments than under more typical market conditions.”