Trustees urged to check correlation assumptions amid US tech boom
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As US tech firms increasingly turn to corporate borrowing for their expansion plans, consultancy Isio advises pension trustees to check they are not falsely assuming diversification benefits from equity and debt instruments issued by the same companies.
US technology companies have come to dominate global stock markets. The listing of SpaceX and the expectation that AI firm Anthropic could float on the stock market at a valuation of $2tn or more will only increase the concentration in global equity indices, but there is another concern.
“The same technology companies that increasingly dominate equity markets are also becoming major issuers of debt. A portfolio can look diversified because it holds both equities and corporate bonds, while a growing share of its underlying exposure is tied to the same companies and the same AI investment cycle,” said Barry Jones, chief investment officer at Isio.
He warned that this could create a blind spot in traditional risk modelling. “Models may assume more diversification between different asset classes than investors would actually experience if there were a significant setback for AI,” Jones said.
Schemes should now consider whether traditional correlation assumptions fully capture the current concentration risk, he advised.
“AI and the largest technology companies will continue to play an important role in pension portfolios. As these businesses become an even bigger part of public markets, trustees need to understand how much exposure they have across the portfolio and consider how that concentration could affect portfolio resilience during periods of market stress,” he added.
