Global funds have been the default option for many investors, as they have (understandably) moved away from the UK market. Typically, these funds have had a chunky weighting in the mega-cap technology companies and have served investors well as a result. However, as mega-caps wobble, it may be time for investors to broaden their horizons in the global sector.
Many global funds will use the MSCI World as a benchmark. However, the index has become increasingly concentrated in recent years, as the technology giants have formed a larger and larger portion of its market capitalisation. The index is now 74% invested in US-listed stocks and has 25% in its 10 largest companies, all of which are US companies, and all but one (JP Morgan) are technology-focused.
This leaves global fund managers with a dilemma – they either raise the tracking error of their fund, or stay relatively close to the index but take the risk that their fund is increasingly concentrated. The dominance of the technology sector has exerted a distorting influence on the sector for some years, and continues to be a thorn in the side of active managers.
Over the past few months, global stock market leadership has been broadening out. The Eurostoxx 50, for example, has outpaced the S&P 500 by over 11% since the start of the year. Opportunities are emerging across the world. It may be time for investors to rethink their global exposure so that it isn’t just a proxy for US large-caps. These are some of the areas that we think investors could explore.
Option 1: Adding small and mid-cap exposure
It has been a tough period for global small and mid-cap companies. Partly, this has been a function of higher interest rates, which are seen as bad news for smaller companies, but primarily they have just been widely overlooked. Investors haven’t felt the need to hunt around in small-cap markets while there has been astonishing growth on offer from the mega-caps.
Small-caps have historically had a growth premium over large-caps. Equally, they tend to have less analyst coverage
Donald Trump’s election was supposed to galvanise the relative performance of smaller companies, but the Russell 2000 is down over 10% since his win. It is a similar picture in the UK and Europe, where smaller companies continue to lag their larger peers.
However, small-caps have historically had a growth premium over large-caps. Equally, they tend to have less analyst coverage, meaning there are more pricing inefficiencies for active managers to exploit. They can be more nimble in response to shifting markets. These factors remain in place, even if investors haven’t been very interested.
Nish Patel, manager on the Global Smaller Companies Trust, says that while the environment will remain volatile, there are factors that should favour smaller companies.
“In an environment where growth is moderate, we are seeing inflation come down and central banks starting to cut interest rates. There might potentially be deregulation from the new administration in the US. That is generally a good environment for risk assets… We want to focus in on the more attractive parts of the world’s stock markets and sectors.”
Option 2: Backing sector specialists
There are a number of specialist funds that may also be worth a second look. Financials, for example, had an astonishing year in 2024. The MSCI World Financials index rose 26.7%, against a rise of 18.7% in the MSCI World index and this strength has continued into 2025. The sector may benefit from the deregulation promised by Donald Trump in his election campaign, but is also seeing strong earnings growth and profitability.
There are a number of specialist funds that may also be worth a second look. Financials, for example, had an astonishing year
The Jupiter Financial Opportunities fund, run by specialist manager Guy de Blonay, includes traditional financial companies such as banks and insurers, but also stock exchanges and online payment companies. He says that there are exciting changes happening in the financial sector.
“AI is beginning to revolutionise the operational landscape of financial services by automating repetitive tasks and streamlining processes. Research suggests that DeepSeek AI can lower operational costs by up to 25%. Robotic process automation (RPA) is widely used to handle data entry and document management, significantly reducing errors and operational costs.”
He believes financial services companies will be able to monetise the savings and productivity gains from AI, potentially adding an entirely new channel of returns that is unrelated to the economic cycle and that could support a rerating of their shares.
Another sector with a compelling growth story is healthcare. This was left behind in 2024, significantly underperforming broader indices. The team on the Polar Capital Global Healthcare Trust says that performance has improved in 2025, with the sector benefiting from the rotation away from US technology stocks. Manager James Douglas admits that the ‘noise’ from the US administration may create volatility in the short term, but says fundamentals look good over the long term.
Option 3: Seek out innovation
Even if investors are looking for a conscious uncoupling from the mega-caps, they are still likely to want some ‘future proofing’ in their portfolios.
The global sector has plenty of choice and there are abundant growth opportunities outside the US mega-caps
The IFSL Marlborough Global Innovation fund, run by Guy Feld, is heavily weighted to technology, but not to the mega-caps. He prefers to look further down the market capitalisation scale, and his fund incorporates long-term themes such as the digitisation of media, cybersecurity, digital payments, water conservation, automation and radio frequency technology. The result is an eclectic, differentiated portfolio that currently includes mobile payments group Boku, pharmaceutical group Vertex and provider of smart water technology Xylem.
The global sector has plenty of choice and there are abundant growth opportunities outside the US mega-caps, which have been neglected in the enthusiasm for all things AI. It may be a moment to explore these alternative options.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre
