Is your portfolio overly concentrated?

Is your portfolio overly concentrated?
Vuyo Nogantshi - 30 May 2019

South Africa has a relatively small equities market with a handful of dominant shares, spread across a few sectors, which are available to invest in. This presents a significant risk for investors: a highly concentrated portfolio.

When compared to global markets, the Johannesburg Stock Exchange (JSE) is relatively small, comprising less than 1% of the total global investing universe. It is also highly concentrated, with the top 10 shares on the FTSE/JSE All Share Index (ALSI) making up between 50% and 60% of the index. In contrast, the top 10 shares in one of the world's major indices, the S&P 500, make up just over 20% of the index.

Most of the ALSI's concentration comes from one share: technology giant Naspers, which makes up 20% of the index. Naspers' dominance in recent years has increased concentration risk for investors, making portfolios overly sensitive to the factors that drive its value. In general, most investors are happy to contend with the exposure, as long as they are still generating positive returns. But what happens when the proverbial goose stops laying the golden eggs; when the dominant share(s) in your portfolio begins to perform poorly?

Read more on you can mitigate your concentration risk

Regards,

Shane Thom, CFP^® GTP(SA)™
Managing Partner: Integrated Wealthcare Advisor