Beware of a new concentration risk creeping into your portfolio

Concentration risk can happen in a myriad of ways in a portfolio. It occurs when there’s an over-reliance to generate returns built on a single asset class or sector.

It's the opposite to diversification, which encourages spreading the risk of potential losses by having several engine drivers in your portfolio, a classic case being a multi-asset approach.

In recent years, it’s often been associated with the US because most of the world’s biggest public companies are listed there. Since most indices are market cap weighted, the largest firms make up a bigger portion of the index and just a handful of stocks make up the majority of the returns. But as investment in AI expands, there’s another concentration risk showing its face in emerging markets.

The top 10 largest stocks in the US S&P 500 index, which include the likes of Apple, Amazon, Nvidia and Broadcom, make up almost 40% of the market. This concentration trend contaminates the global indices as well, where the US accounts for 60% of the MSCI All-Country World Index.

The warning bells of the US-global index concentration have been loudly sounded for many years because the majority of equity investors have some exposure to either market.

But this new concentration risk is coming from emerging markets, and more specifically, South Korea. And it could be happening without investors fully realising it.

Since last summer, emerging market equities have generated the highest total returns of all major indices, beating the US Nasdaq 100 and S&P 500. The Korean market has done even better, generating a total return of almost 100% while the MSCI Emerging markets index has made 35.5%.

This has mainly been driven by the performance of Samsung Electronics and SK Hynix, two stocks which have become infused with the AI story.

SK Hynix, for example, has seen its share price grow 300% in the first half of 2026, while Samsung is up almost 100%.

AJ Bell analysis found that Korean focused funds had stormed ahead of the S&P 500 over the near and longer term due to this recent rally.

In a bid to partake in the AI trend and add some regional diversification to their portfolio, investors may be considering buying an EM or a Korean-focused fund.

While this would give some differentiation to the US, it could also bring another concentration risk into the portfolio investors might not be aware of.

In the Korea Composite Stock Price Index (KOSPI), the main benchmark for Korea, Samsung and SK Hynix make up almost 70% of the index. This makes it one of the most concentrated indices in the world.

And just like the trend of US concentration feeding into the global indices due to the index weightings, this pattern repeats between the Korean market and broader EM universe.

While it's not as extreme as we see in the US-global markets pipeline, with Korea making up 25% of the MSCI EM benchmark it is worth noting the rising influence of one market on an entire regional sector.

The MSCI Emerging markets index has other concentration risks beyond Korea, as Taiwanese chip giant TSMC accounts for 15% of the index.

Companies are becoming bigger at a much faster rate than we’ve seen before. There are 14 companies that have reached a $1 trillion valuation, and all of them came on this side of the millennium. Out of those, 10 have come since 2020. Read more in our look inside the $1 trillion club. 

This means that, with most major indices being market-cap weighted, they are all becoming more and more concentrated as just a few companies are making the majority of the returns. That feeds a cycle of those few names getting bigger and bigger and their impact on the index greater and greater.

So when you’re looking to diversify geographically just be conscious you’re not exposing yourself to another strain of concentration risk from elsewhere.