Monthly Fund Focus: US markets

Posted on 1st August 2025 | By David Stevenson

This month’s dive into the world of funds examines a high-quality way to invest in US equities, whose valuations are edging relentlessly higher. However, it’s not just US equities that are outperforming – after a prolonged period of underperformance, the share prices of many UK-listed alternative funds have pushed ahead.

Too much of a good thing in the US markets

Should you be worried that US equities are so exceptionally successful?

One of my favourite discussion topics when talking to investors is to get them to determine their actual underlying exposure to US equities, especially the Mag7. Add up what’s in your various portfolios, ISAs, your speculative positions, your SIPPs, and your DC target risk and target date funds. Unless you are nearing retirement, you probably have a much higher exposure to US equities than you realise—mainly because US stocks and shares have performed so well. Many long-term investment plans and global equity funds are benchmarked against an index called the MSCI ACWI index (with the MSCI World or FTSE World as alternatives). This index has 64% exposure to US equities, with Information Technology as a sector accounting for 24%, and the Mag7 making up just under 20% of the index. A close rival is the MSCI World index, which has nearly 72% exposure to US equities and just under 22.5% to the Mag7.

At this point, investors start to feel slightly uncomfortable. They’ll smile at the fact that returns have been excellent – even in recent weeks – but they’ll soon begin to worry about all the myriad risks in that exposure: the valuations, the concentration in a handful of stocks and the exposure to the dollar. Has the exceptional outperformance of the US (and its deep, liquid markets) created a risk to your portfolio?

Let’s be specific here: there are three interconnected but separate issues to consider. The first is whether overexposure to the US as a country and the dollar as an asset (which is currently weakening on the FX markets) is beneficial. Next is what we could call style risk for US equities, meaning whether I am overexposed to a specific type of US equity, such as tech stocks or growth stocks. The third risk is concentration risk, where you are concerned about being exposed to just a few stocks, specifically a suitably magnificent seven. It is helpful to distinguish these risks because, for example, you might be comfortable being overexposed to US assets, equally comfortable being overexposed to US tech growth stocks, but worried about putting all your eggs in the Mag7 basket.

Begin by considering concerns about overexposure to the dollar and US assets generally during Trump’s presidency. The dollar has been weakening (which is bad news for UK investors in US assets as valuations have dropped), and it could decline further (Trump would probably welcome that), but there is no evidence of a ‘flight from the US’ so far among private investors. Strategists at US investment bank Morgan Stanley recently analysed fund flow data on what foreign investors are buying and selling and found little sign of a widespread sell-off of US dollar assets. In fact, weekly data from Lipper on global equity ETFs and mutual funds show that international investors have been net buyers in the weeks following Liberation Day and throughout most of May.

But have we all – outside the US – become more exposed to its equity market? The short answer to that question is yes! In 2015, the MSCI ACWI index was only 51% invested in US equities; now it’s 64%. In 2015, Apple was the biggest stock (not Nvidia as it is now) with Microsoft not far behind at just under 1%. The price-to-earnings ratio of this index (a key valuation metric) was 18.50 back then. If we go back further to the year 2000, the US was at 48% (with the UK in second place at 8% exposure). So, is the US close to all-time highs in terms of geographic exposure? Yes, but not exceptionally so – and let’s be honest, if it is, that’s because US corporates have been growing their earnings at an above-average rate.

We can see this clearly with the S&P 500 benchmark index, which tracks US blue chips and has produced an annualised return of 12.8% over the last ten years. US profit margins are among the highest globally, which helps explain why the American index trades at a robust 27 times earnings, which is a somewhat excessive level, to put it mildly.

What about concentration risk or a bias towards specific sectors? Again, there are reasons to be worried, but let’s not get hysterical. The information technology (IT) sector is the biggest slug at 31% of the index, while the Mag7 comprise 32% of the value of the S&P 500 index. Technology’s share of the benchmark US index is high, but not amazingly high. As for concentration risk, if we look at the top ten stocks in the US index over the last century or so, all the way through to the mid-20th century, the top ten names have usually hovered around 20-30%, dropping below that level in the 1990s and 2000s, and then rising sharply in the last few years, reaching a peak of 40% in early 2025. And one sector has long tended to dominate the index – it used to be banks, now it’s tech.

So, what should you do? I’m more cautious about US equities than most and feel more comfortable running US equities at a closer to a 50 to 60% range in a portfolio full of equities. That’s what many successful global equities fund managers, such as the Alliance Witan Investment Trust, have been doing for a while now, notching US equity exposure to below 60%. Like many active fund managers, I’d be overweight Japan as well as the UK, which strikes me as cheap and provides valuable global diversification.

If you still want significant US exposure but seek more diversification, consider choosing a different style or type of stock within a fund. Instead of merely investing in a few tech giants, you could track US equities through something like the Invesco S&P 500 Quality UCITS ETF, which includes the 100 companies with the highest quality scores within the parent S&P 500 index. Alternatively, you might prefer cheaper, more value-oriented stocks and strategies. In that case, there’s an ETF from a firm called Ossiam that tracks an index devised by economist Robert Shiller – it’s called the Shiller Barclays CAPE index. This index (and ETF) still invests in big tech names, but it also tilts towards other well-known firms, with somewhat cheaper share prices, such as Eli Lilly, Costco, and Walmart. More generally, most active, stock-picking US equity fund managers tend to be biased against Mag7 stocks and more exposed to cheaper, value, and quality stocks, as they are more concerned about concentration risks and high valuations.

Oh, and if you think all this talk about US exceptionalism is just needless worrying, then why not go all in, bet on the coming AI transformation, and just buy the Mag 7 names, perhaps excluding Tesla and replacing it with Broadcom, another tech leviathan. One actively managed investment trust that embodies this ‘all-in’ AI-first strategy is the Manchester and London investment trust, which essentially represents a substantial bet on Nvidia and Microsoft (64% of the portfolio) alongside Broadcom and Arista, two other AI-related companies (another 12.5% of the portfolio). Two tech investment trusts, Polar Capital Technology and Allianz Technology, are also betting big on AI and on US tech, but with a more diversified portfolio, which even includes some international names.