Pensions and investments millions have in these major funds are in for a bumpy ride. Now our experts reveal if it’s time to ditch them – and what you need to do now
If you have a pension or investment portfolio there is one fund type that you almost certainly hold – and while it will have made you excellent returns over the past decade, experts now warn its future is far more precarious.
Global passive funds that track an index of the world’s largest companies form the bedrock of most investment portfolios. They give cheap and easy access to thousands of companies and have delivered stellar returns.
A typical global tracker, which follows the MSCI World Index, is up almost 180 per cent over the past decade – miles ahead of a 150 per cent gain by ‘active’ global rival funds where stocks are picked by a manager. Charges are as little as 0.1 per cent, too, versus around 0.8 per cent for an actively managed equivalent.
But experts warn that investors in these funds may be lulled into a false sense of security, believing that their risk is spread as they are invested in companies in all sectors and geographies rather than just committing to one.
Investors may be taking on far more risk than they realise, though. A staggering 70 per cent of the MSCI World is in US stocks and close to 25 per cent is in tech giants.
In fact, the MSCI World Index is the most concentrated it has been for 40 years, with the ‘Magnificent Seven’ alone making up more than 22 per cent: Alphabet, Amazon, Apple, Meta,Microsoft, Nvidia and Tesla.
That’s all fine while the US stock market and these few companies perform generally well, like they are today. But even a slight dip would dent investors’ portfolios.
We got a taste of this during the most recent sell-off: the MSCI World Index fell 10 per cent between January and early April, dragged lower by the US market which plunged 20 per cent.
Experts warn that investors in such funds may be lulled into a false sense of security, believing that their risk is spread as they are invested in companies in all sectors
The first fall was due to the surprise release of Chinese AI chatbot Deepseek, which knocked confidence in the big US tech firms and their potential to dominate the growing AI market.
Then, in April, US President Donald Trump delivered his Liberation Day tariff announcements, sending stock markets into a tailspin as levies proved harsher than expected.
The US market lagged behind its international peers by 10.5 per cent during the first quarter of this year – the biggest gap recorded in 23 years.
‘This is remarkable and may signal a change in the world order never seen before in our lifetime,’ explains veteran fund manager Charles Montanaro.
The MSCI World and the US market have since made up ground, but Montanaro warns that the recent sell-off could signal trouble ahead.
The US’s huge budget deficit, the potential for further dollar weakness, Trump’s unorthodox trade policy and very high share price valuations are reasons to question whether its stock market can repeat the gains of the past decade.
Further risks
A second danger of tracking an index is in its design: the bigger the firm, the greater proportion of the fund is invested there. And by simply buying the biggest companies, you risk putting your money into yesterday’s winners.
‘If you look at the top companies in the MSCI World Index ten, 20 or even 30 years ago, they change and evolve,’ says Samir Shah, a senior fund analyst at wealth manager Quilter Cheviot. ‘By basing your investment decision on [the size of companies], you risk… exposing yourself to the danger of lower future returns.’
Even if the US market disappoints and weighs on the MSCI World Index, your tracker will recover and continue to deliver gains
Mick Gilligan, a partner at wealth manager Killik & Co, agrees – its analysis indicates low returns from US stocks over the next ten years.
‘The model also suggests that almost every small cap market in the world looks attractive,’ he says. ‘But if you are invested in an MSCI World Index fund, you are not going to have small cap exposure.’
Smaller companies tend to perform better than medium and large businesses over very long time periods as they grow at a faster rate. However, this hasn’t been the case over the past five years – a time when mega-caps have dominated.
Plans for investors?
If you have an investment timeframe of 15 years plus, experts advise keeping some of your money in a global tracker.
Even if the US market disappoints and weighs on the MSCI World Index, your tracker will recover and continue to deliver gains.
Laith Khalaf, head of investment analysis at DIY platform AJ Bell, suggests reducing your investment in a global tracker and recycling profits into cheaper markets such as the UK, Europe, Japan and emerging markets.
He notes that warning signals have been flashing red for a while in relation to how concentrated the MSCI World has become, but this doesn’t mean the US market is going to crash any time soon.
‘Those chickens haven’t really come home to roost,’ he says.
Kamal Warraich, an investment analyst at Canaccord Genuity Wealth Management, notes that investors who sold out of the US market earlier this year would have missed out on the subsequent recovery from late April onwards.
He says: ‘What we have seen through history is that markets go through massive cycles, and judging the point at which these change and shift is near impossible. You don’t have to sell out of your global tracker completely, just add some other things in your portfolio.’
One option is a global ‘equal-weighted’ fund, which weights each company in the index equally rather than by their size. This helps you hold more in medium-sized companies. One example is the Invesco MSCI World Equal Weight ETF.
You could also add a range of funds that track indices around the world from non-US regions. Alternatively if you are open to an active approach, you could complement a global tracker with active funds or investment trusts to hold a different mix of investments compared to the index.
One of Shah’s favourite active funds is Royal London Global Equity Select, which has a ‘good team, process and track record’.
It is up 64 per cent over three years versus 33 per cent for global funds on average. Khalaf, meanwhile, highlights the JPM Global Equity Income fund. It is up 34 per cent over three years with charges of 0.84 per cent.
And Gilligan’s top pick is Murray International, which is managed by Aberdeen and yields more than 4 per cent. It is up 38 per cent over three years and costs 0.59 per cent. ‘I think people can easily expect a dividend to increase year-on-year in that one,’ Gilligan adds.
