The pros and cons of funds that invest boldly

Concentration has become a hot topic for investors. By the end of 2025, the so-called Magnificent Seven accounted for 22% of the Morningstar Global Total Market Equivalent Index - more than the seven largest non‑US country exposures combined.

With so much capital now tied to index funds, portfolio concentration is a pressing issue for both active and passive investors.

We have tackled this issue head-on to understand what concentration really means for fund investors, and whether bold portfolios actually deliver.

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Popular metrics for assessing portfolio concentration leverage simple indicators such as the top 10 holdings’ weight, or the total number of positions in a portfolio. While easy to grasp, these metrics miss critical dimensions, overlooking key factors such as sector-level concentration and correlations among securities, which are often major drivers of risk, return, and portfolio construction.

Enter the “Concentration Score” - a composite measure designed to capture a holistic view of portfolio concentration by integrating six complementary metrics, reflecting different dimensions of concentration. These inputs are organised into three buckets - stock-level, sector-level, and return-based concentration - and then aggregated in a carefully calibrated manner to produce a single, unified score. This single number provides investors with a clear, actionable view of concentration risk, making it easier to compare portfolios and identify potential vulnerabilities.

The results are revealing. A compact portfolio of 30 stocks may appear more concentrated than it really is, once accounting for its sector footprint and the correlation of the underlying stocks. A good example is GuardCap Global Equity I GBP Acc, whose portfolio is not as punchy and risky as it looks at first sight. On the flip side, broad portfolios of 100 or more stocks can be much more concentrated than they appear, if the manager invests most of the capital in a few related areas.

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Actives vs Passives

Across nearly every category studied, passive funds are more diversified than active funds, as they often replicate broad market indexes. However, some benchmarks are no longer as diversified as they used to be. For example, the S&P 500’s concentration is on the rise, especially as its top 10 holdings weight and industry concentration surged in recent years.

Still, the trackers that replicate this tally remain more diversified than most US-focused funds and exchange-traded funds (ETFs). But the equivalence between active management and concentration can also be misleading. Active strategies can offer deep diversification, too - for example, by employing systematic or multi-manager approaches. Indeed, Dimensional Global Core Equity GBP Dist ranks as one of the most diversified portfolios in our study.

Value and Growth

Concentration isn’t evenly distributed across the equity landscape, as the winners-take-all effect is most powerful in some pockets. Indeed, growth funds have become the boldest segment of the market in Europe, global, and US equity, and the trend has hardened over the past decade.

Because market leadership is increasingly dominated by a handful of high-growth mega-cap winners, growth-oriented funds now show consistently higher concentration across all key metrics. They hold fewer stocks. They carry heavier sector tilts. And their diversification ratios, which measure how much correlations reduce overall portfolio volatility, are lower.

In part, that reflects cyclical dynamics rather than structural changes. Correlation spikes in 2020 and 2022 in the US and European markets with the pandemic and post-pandemic shocks, alongside a change in the interest rate regime, have led to stronger correlation among growth stocks.

That said, European growth managers, for example, often cluster around a small set of global champions in software, luxury goods, healthcare, and technology. These are often legitimate high-quality franchises, but a narrow investable universe introduces potential risks that shouldn’t be ignored.

The takeaways

Concentration is neither bad nor good, per se. However, highly concentrated funds show wider return dispersion, deeper drawdowns, and higher volatility.

Growth funds’ higher average concentration therefore makes them harder to stick with and potentially more exposed to extreme outcomes. Their upside can be spectacular, but the design carries more fragility than most investors acknowledge. And manager selection skills are particularly important for highly concentrated actively managed funds.

In short, diversification still matters, as more diversified funds can be easier to own and carry lower risks of missing out on the few stocks that sometimes drive an outsize proportion of market gains.

Francesco Paganelli, principal, manager research at Morningstar.