The sheer dominance of US mega-cap technology stocks and the growth of passive investing have arguably been the two biggest narratives which have impacted the outlook for global equities in the past decade or so.
I recently read that more than $2trn has moved out of active funds and into passive funds in the US alone over the past 10 years. Passive funds now hold a higher percentage of the US stock market than active funds. This has also helped the growth of some of those big tech players who make up a large part of many popular passive indexes.
Earlier this year, the diversification of the equity market was at the lowest it has been for a generation. But recent events have been a timely reminder of the benefits of having a well-diversified portfolio of stocks (although even that has not protected us to a certain degree!)
I recently caught with Orbis Global Balanced manager Alec Cutler, who pointed out that some of these tech beasts may have “run out of gas”. These companies, with near $3trn market caps, need to come up with new ideas every few years to meet their growth expectations, he said.
Artificial intelligence (AI) might be seen as the new revolutionary step for these companies, but we do not know how they plan to fully monetise it as a proposition – something which could take a number of years. I’m not saying mega-cap tech companies are too expensive to go near (we still need iPhones etc.) but they are far from cheap and are just as susceptible to market volatility.
With this in mind, we have highlighted a few funds offering meaningful diversification to the MSCI World/Information Technology Index over the past decade.
China: Fidelity China Special Situations (-0.01 correlation to MSCI World/Information Technology)
Chinese stocks have historically exhibited low correlation with US markets. While the US market has had technology as its centrepiece for years, China is catching up in the AI race, with the arrival of DeepSeek causing a trillion-dollar sell-off in the Nasdaq.
Fidelity China Special Situations has been a strong performer over the long term. Aided by a well-resourced team, manager Dale Nicholls has a bias towards small and medium-sized companies. The trust also has reasonable exposure to A-Shares, an area which has a particularly low correlation to global markets because of the unique economic, political and monetary policy considerations.
Nicholls is cautiously optimistic on the market after a challenging period, citing stability in the property sector, a softening regulatory environment and valuations still looking attractive versus history.
Precious metals: Jupiter Gold & Silver (0.17 correlation)
Gold was a standout performer in 2024 – a move which has continued this year, with the yellow metal passing the $3,000 barrier.
According to Jupiter Gold & Silver fund manager, Ned Naylor-Leyland, expectations for economic expansion, yields and inflation suggests a positive but possibly more modest growth for gold in 2025.
He said: “In our view, the recent moves upward for the gold price are related to its traditional role as a safe-haven asset, concern about economic growth and Trump’s trade policies, expectations that interest rates may fall and demand for the precious metal from central banks.”
Jupiter Gold & Silver combines physical gold and silver bullion with mining shares, which offer deep relative value. The fund is very sensitive to geopolitical risk and typically avoids mining companies which invest in dangerous parts of the world. Its neutral position is 50:50 gold/silver.
Asia: Federated Hermes Asia ex-Japan Equity (0.2 correlation)
Federated Hermes Asia ex-Japan Equity is a concentrated fund investing in emerging markets within the Asia ex-Japan region. Manager Jonathan Pines is willing to buy all types of companies if the price is right. He actively invests in stocks that are currently out of favour but which he believes are likely to perform better in the future. Stocks are typically held for 18-24 months.
Performance has been incredibly strong over all time frames. The fund currently has its largest exposure in China (46.1%) and South Korea (24.5%). The value nature of this portfolio is likely to continue to offer an attractive profile should US growth stocks correct.
Europe: BlackRock European Absolute Alpha (0.31 correlation)
Being pan-European, the BlackRock European Absolute Alpha fund offers a wide range of opportunities, which are increased by investing in both long and short ideas. It is uncommon to see a fund invest in companies on both mainland Europe and in the UK, especially when also using a multi-cap approach to invest in firms of all shapes and sizes.
The fund’s managers are looking for low correlations to other asset classes and have a volatility range within which they operate, aiming for between 3% and 5%. They are conscious of the need to preserve capital and with this priority in mind, they look at the resilience of a company, ensuring its business model is adaptable in the event of market change.
The fund has produced a positive return in eight of the past 10 calendar years (2015 to 2024).
Infrastructure: First Sentier Global Listed Infrastructure (0.36 correlation)
Whether it’s roads, hospitals or schools, infrastructure is an essential element of modern society. Simply put, infrastructure will always need to be built or renewed, making it an attractive long-term investment. It also offers a degree of inflation protection.
First Sentier Global Listed Infrastructure invests in hard infrastructure, such as bridges and ports, globally via listed companies that own the assets, preferring to invest in real infrastructure assets with barriers to entry and pricing power.
Peter Meany is one of the most experienced managers in the industry and is primarily a conservative investor, which he believes is key in achieving long-term capital growth. The fund also yields 3%.
Darius McDermott is managing director at FundCalibre and Chelsea Financial Services. The views expressed above should not be taken as financial advice.