Your “diversified” pension may lean on a handful of tech giants more than you think

If your pension tracks a global index, it probably owns a slice of more than a thousand companies. That sounds like the definition of diversified. It isn’t quite.

Your money isn’t spread evenly across those companies. A large share of it sits in a few very big businesses, and most of them are American tech firms. That can work in your favour or against you. Either way, you should know it’s there.

Why would a diversified pension be concentrated in tech?

Most index funds weight companies by market capitalisation, meaning their total stock market value. The bigger the company, the more of your money it gets.

Put simply: a company worth £1 trillion gets ten times as much of your pension as one worth £100 billion. The fund owns both. Only one of them really moves the dial.

Over the past decade, the largest tech companies have grown far faster than almost everything else. Index funds followed automatically, so those companies now take up more of your pension than they used to. Nobody sat down and chose to put more of your money into tech. The index did it for you.

How big is the US and tech share of a global index?

Bigger than most people assume. In the MSCI World Index, one of the most widely used measures of developed stock markets, the United States accounts for well over half of the index and information technology is its largest sector.

So a fund with “global” in its name can be, in practice, mostly a bet on US companies, and a good part of that bet is on US tech.

The growth of passive investing adds to the effect. More of the money in markets now follows index weightings, and those weightings favour whatever is already biggest.

Does this mean something bad is about to happen?

No. Concentration isn’t a forecast, and Sedulo Wealth isn’t predicting a fall in tech shares.

It cuts both ways. When the largest companies do well, and many have in recent years, a concentrated fund does well with them. When they have a rough patch, the whole fund feels it, however many companies it holds.

It also explains why market headlines can mislead. “Markets hit a record high” can mostly mean a handful of giants hit a record high, while plenty of other shares in the same index did nothing of the sort. Your pension follows the heavyweights.

How can you check how concentrated your pension is?

It takes about fifteen minutes.

• Find the fund name. It’s on your pension statement or in your provider’s app.
• Pull up the factsheet. Search the fund name followed by “factsheet”. Providers publish them, usually monthly.
• Look at three things. Check the top ten holdings, the country split and the sector split. Add up the top ten weightings to see how much of the fund rests on ten companies.
• Do it for every pot. Include old workplace pensions and ISAs.

That last step is the one people skip, and it’s often the most revealing. Three pots with three different providers can all be tracking much the same companies. That isn’t diversification. It’s the same bet, three times.

What should you do if your pension is heavily weighted to tech?

That depends on your goals, how long until you need the money, and how you’d feel if those big names had a difficult few years.

If retirement is decades away, you may be comfortable with it. If you plan to start drawing an income soon, how much rests on a small group of shares deserves a harder look. Neither answer is automatically right.

The point is that it should be a choice you’ve made, not something that built up quietly while you weren’t looking.

You don’t need to work this out alone. Your adviser can talk it through against your actual numbers.

FAQ

What is a market capitalisation weighted index?

It’s an index where each company’s share depends on its total stock market value: share price multiplied by the number of shares in issue. The bigger the company, the bigger its share. Most major indices, and most funds that track them, work this way.

Is a global index fund still a sensible way to invest?

For many people, yes. Global index funds are usually low cost and give broad stock market exposure in a single product. The issue isn’t the fund. It’s assuming “global” means evenly spread. Whether one suits you depends on your circumstances, and that’s a question for personal advice.

What’s the difference between diversification and concentration?

Diversification means no single company, sector or country dominates your results. Concentration means a few holdings drive most of the outcome. A fund can own a very large number of companies and still be concentrated if most of its value sits in a handful of them.

Does tech concentration matter more as I get closer to retirement?

It can. With decades to go, you have time to recover from a fall. Closer to retirement, a sharp drop in a few large holdings can have a bigger effect on the income you’re able to take. That’s why so many people review how their pension is invested as retirement gets nearer.

Should I move my pension out of technology shares?

Not because of a headline. Reacting to market news often means selling after a fall or buying after a rise, which is the wrong way round. Start by understanding what you hold, then check whether it fits your plans and how many ups and downs you can live with. An adviser can look at that across your whole position.

About the author

Sedulo Wealth is the financial planning division of Sedulo Group. Its advisers work with individuals, families and business owners on pensions, investments and financial planning, as well as workplace advice. Sedulo Wealth Management is authorised and regulated by the Financial Conduct Authority.