Investors rethink concentration risk and diversification

Key Points

As traditional asset-class labels no longer adequately describe portfolio risk, investors are moving to evaluate common economic drivers and uncover hidden vulnerabilities by confronting unintended factor crowding across listed equities, private markets and real assets, and re-evaluating how portfolios are constructed.

“Allocators are increasingly looking through asset-class labels and measuring exposure to common underlying drivers such as growth, real rates, inflation, liquidity and technology spending,” said Matthias Scheiber, senior portfolio manager and head of the multi-asset team at Allspring Global Investments. "The focus is shifting from capital allocation to risk allocation, because portfolios that appear diversified often share the same economic exposures."

Ninghui Liu, head of investment strategy and research, Apac, at State Street Investment Management, pointed out that "the measurement problem is that asset-class labels no longer describe risk," advocating a look-through approach to evaluate core risk drivers and overcome this limitation.

Investors are also discovering that seemingly unrelated investment themes often depend on the same underlying economic assumptions, creating hidden concentrations across industries and asset classes.

The shift reflects growing concerns among asset owners that traditional diversification frameworks may no longer provide adequate protection in today's markets.

Investments spanning equities, private credit, infrastructure and real assets are increasingly exposed to the same macroeconomic drivers, raising the risk that portfolios could suffer correlated losses even when holdings appear diversified on paper. As a result, institutions are reassessing how they measure concentration risk and how they implement portfolio strategies designed to mitigate it.

"The better practice is to decompose the total portfolio into its underlying economic exposures rather than its legal or accounting buckets, so that listed equity, private credit and real assets can be examined against a common set of drivers," Liu said. “Concentration in holdings is not automatically concentration in risk, so the analysis should focus on shared cash-flow drivers rather than on name counts.”

OVERLAPPING THEMES AND SINGLE-POINT DEPENDENCIES

Hidden concentration risk is affecting sectors besides artificial intelligence, as even when investing outside of big tech, sectors that seem completely unrelated—such as energy, defence and manufacturing—are often impacted by the exact same economic conditions.

According to Scheiber, monetary policy, digital infrastructure, semiconductor supply chains and defence-related capital spending stand out as interconnected thematic risks.

Liu identified energy transition, defence reshoring and advanced manufacturing as primary areas of overlapping exposure for Asian asset owners. He also cautioned that portfolios often look deceptively balanced while relying on a single macroeconomic premise, warning that they ultimately rest "on one underlying assumption, which is that global capital expenditure on physical infrastructure continues at the current pace."

Identifying these common drivers is only the first step. Asset owners must also assess how portfolios would behave if a key assumption underpinning multiple holdings were to break down.

Scheiber suggested to “stress-test portfolios against key dependencies rather than individual securities," evaluating scenarios, for instance, where data-centre economics deteriorate or energy costs rise  simultaneously across equities, credit and infrastructure.

However, institutional implementation across the wider market remains uneven. According to Liu, "this is where practice still lags awareness," as relatively few asset owners have mapped counterparty-level dependencies across their total holdings.

“A useful discipline is to ask what happens to the portfolio if one anchor tenant reduces its capital spending plan, say by a quarter, and then to trace that shock through the private credit book, the real-asset valuations and the listed equity sleeve at the same time rather than separately,” he said, using a real estate example to illustrate the challenge.

SYSTEMATIC AGILITY AND DYNAMIC FIXED INCOME

Once hidden concentrations have been identified, the next challenge is implementation. Asset owners increasingly need investment approaches that can adapt quickly when market leadership changes or macroeconomic assumptions shift, prompting renewed interest in systematic equity and unconstrained fixed income strategies.

While robust stress-testing addresses underlying structural risks, managing rapid market shifts also requires execution agility.

“Systematic equity strategies have outperformed fundamental equity in 2026 due to a structural regime shift in the markets away from the predictable, concentrated mega-cap of previous years,” said Ecaterina Bigos, senior market strategist at BNP Paribas Asset Management.

While algorithmic models adapted swiftly, many fundamental active managers remained overweight in previous market darlings. 

“Quantitative models caught early signals of market broadening and systematically rotated capital into pockets and under-the-radar beneficiaries,” Bigos said.

The need for dynamic flexibility is seen in fixed income markets, where static indices struggle in non-synchronised economic environments.

"Unconstrained fixed income strategies outperformed index-constrained strategies in 2026 as traditional bond benchmarks constrain investors to carry interest rate risk as guided by the benchmark,” Bigos said.

By breaking free from benchmark constraints, active bond managers can better protect capital during macro volatility. Bigos added that "unconstrained or absolute return fixed income strategies provide managers with geographic, sector and duration flexibility to navigate market shifts," noting that managers can adjust duration from negative or zero levels up to double digits.

As the boundaries between traditional asset classes blur and structural themes create unexpected concentrations, institutional allocators must align their risk frameworks with real economic drivers by combining look-through factor analysis and counterparty stress-testing with unconstrained implementation.