Beware ‘unconscious concentration’: Rethinking diversification

Produced in partnership with Orbis Investments.

Diversification is one of the most familiar ideas in investing. But looking around at the concentration risk that now defines large parts of today’s market, it is also one of the ideas most in need of a rethink.

The principles of diversification are straightforward and generally well understood by investors: spread risk so that no single setback can do too much damage. But in an equity market shaped by a narrow set of market leaders and increasingly crowded positions, that principle has become harder to apply than many portfolios suggest. It’s possible, after all, to have a portfolio that appears diversified on paper but still behaves like a concentrated bet in practice.

Genuine diversification is less about how many holdings sit in a portfolio than about what is driving them. A portfolio can span geographies and asset classes yet still be pulled by the same forces. When that happens, apparent breadth can give way quickly once conditions change.

A global portfolio can still be a crowded trade

One common mistake is to assume that just because a portfolio contains global equities it is naturally diversified.

The MSCI All Country World Index is typically considered one of the most diversified major global equity benchmarks, yet it too is highly concentrated in similar themes – a reminder that what appears to be a globally diversified portfolio can still amount to a concentrated exposure to one market, one part of the market and one set of expectations. As at 31 March 2026, 63 per cent of the index was allocated to US stocks, while mega-cap companies made up 76 per cent. Information technology and communication services together accounted for over a third of the index, with the so-called “AI Eight” — Nvidia, Microsoft, Amazon, Meta, Broadcom, Alphabet, Oracle and Palantir — representing close to 17 per cent.

That level of concentration may feel comfortable while the tailwinds blow, but it also leaves portfolios increasingly exposed should the winds change. This kind of unconscious concentration is one of the less appreciated risks in markets today.

In uncertain markets, diversification by behaviour matters more than diversification by name. Investments should be spread across regions, sectors, and economic drivers. Some of our most compelling investment opportunities barely register in the index – in fact only 8 per cent of the Orbis Global Equity Fund (by weight) overlaps with the MSCI All Country World Index (as at 31 March 2026). For instance, we’ve found attractive opportunities (many beyond the US) in places like UK industrials, biotechnology, and select Asian technology and consumer businesses. The portfolio is deliberately constructed to hold a few, diverse, high-conviction ideas that produce idiosyncratic returns.

Starting valuations matter

At Orbis we focus on fundamentals and believe the value of a business ultimately rests on its future cash flows.

This valuation discipline is key to making sense of today’s market. Orbis’ analysis shows that as at 31 March 2026, on almost every long-term measure, global stock markets have rarely been more expensive. Global markets now sit at their 91st percentile relative to the past 50 years, meaning they have only been more expensive seven per cent of the time.

That does not tell investors what will happen over the next six or 12 months, but it does offer a cautionary note: when valuations have reached similar levels in the past, the decade that followed delivered modest and sometimes disappointing returns.

The gap between the US and other markets is especially notable. As at 31 March 2026, the US cyclically adjusted price-to-earnings ratio is around 35 times, while emerging markets sit closer to 16 times, with markets such as Japan and the UK also trading on much lower multiples. That does not mean the US cannot continue to perform well, but it does suggest that a great deal of optimism is already reflected in prices. By contrast, value can still be found in areas of the broader market has yet to fully appreciate.

Valuation discipline always shapes Orbis’ positioning, but some points in the market cycle has resulted in stark differences – from avoiding Japan at the height of its bubble in 1991, to favouring value shares during the late 90’s technology boom, to investing early in areas such as semiconductors. By positioning the portfolio away from the crowd when valuations warranted it, Orbis sought to avoid some of the market’s most crowded excesses while uncovering opportunities that were still being overlooked or undervalued. The lesson is simple: when valuations are stretched, caution matters; when they are depressed, opportunity often follows. Starting valuations remain one of the strongest guides to future returns.

Diversification is not just geographic

Confusion about what constitutes genuine diversification can happen when investors think too simplistically about diversification. At Orbis, genuine diversification starts with doing something different: grounding every investment in valuation discipline, building the portfolio selectively one business at a time, and being prepared to stand apart from consensus when valuations warrant it. For readers interested in how that approach translates into portfolio construction, Orbis’ whitepaper, Rethinking Genuine Diversification, explores the hidden concentration in global indices, the risks of style and regional crowding, and where a more selective, differentiated approach may uncover better long-term opportunities.