Superannuation funds may be carrying significantly more artificial intelligence (AI) exposure than they realise, with Northern Trust Asset Management (NTAM) warning traditional approaches to diversification are becoming less effective as a growing share of global equity returns is being driven by the same underlying themes.
Speaking to Super Review, NTAM global co-chief investment officer Anwiti Bahuguna said concentration risk had emerged as one of the most common concerns raised by superannuation funds and other institutional investors during meetings across Australia and New Zealand.
The concern comes as super funds continue to increase allocations to global equities in search of growth opportunities, while maintaining substantial exposures to Australian shares.
Although portfolios may appear diversified across regions and asset classes, Bahuguna said investors increasingly risk finding themselves exposed to the same earnings drivers through multiple holdings.
According to Bahuguna, many investors continue to view diversification through a geographic lens despite market leadership becoming increasingly concentrated around a relatively small number of sectors and companies linked to artificial intelligence.
“Diversification is not countries anymore, it’s more about where you’re getting your earnings.
“Even if you may think you’re diversified because you have a US exposure and you have exposure to emerging markets, if you look within emerging markets, what’s doing well, things like Korea and Taiwan, which are very concentrated markets with again nothing but AI exposure and semiconductor exposure.
“Essentially you’re not really diversified, even though you think you’re in US and EM, you’re actually basically doing the same AI play,” she said.
The comments reflect a broader challenge facing large institutional investors as AI-related companies continue to dominate global equity returns.
While super funds have sought diversification through offshore allocations, Northern Trust argues that geographic diversification alone may no longer provide the protection it once did if underlying earnings exposures remain concentrated in the same themes.
Rather than focusing solely on country allocations, Bahuguna said investors should assess portfolios through the lens of factor exposures, including growth, value, dividends and quality.
“For diversification, it’s important to look through your holdings and see what sort of factor exposures you have. Are you getting exposure to growth, are you getting exposure to dividends? Are you getting exposure to value? Are you holding a selection of stocks that, regardless of the domicile of the stock, is giving you earnings exposure across various dimensions?” she said.
The issue was particularly relevant for long-term investors such as super funds, which must balance participation in powerful structural growth trends with the need to manage risk across multi-decade investment horizons.
While concerns about concentration risk have intensified alongside the rapid growth of AI-related companies, Bahuguna said Northern Trust remained constructive on the technology’s long-term prospects and did not believe investors should retreat from the theme altogether.
“Don’t get me wrong, we think it’s still early days. In fact, all the conversations I had made me think people are still very much interested in it, but my thought is that it has to be that you have some sort of balance in your portfolio to take care of the wobbles that might happen when there are worries about this or when everything gets fully priced in,” she said.
The enthusiasm surrounding AI was one of the strongest themes Bahuguna encountered during her discussions with investors as many organisations are actively exploring how the technology could be incorporated into investment processes and broader business operations.
At the same time, investor concerns about a potential AI bubble have become more pronounced as valuations have climbed and capital expenditure across the sector has accelerated.
Bahuguna acknowledged some of those concerns but argued the market’s focus on the risks of AI often overlooked the strength of the underlying economic and corporate fundamentals supporting the investment cycle.
Beyond portfolio concentration, Bahuguna identified geopolitics and inflation as the most significant risks facing long-term investors.
Markets have largely recovered from recent geopolitical disruptions, including trade tensions and conflict in the Middle East, but she warned that repeated supply-side shocks could continue to complicate the inflation outlook and challenge central banks.
“These sort of shocks have generally, for the last four years, kept inflation above most central bank targets. Our base case still is that prices will come down over the next 12 to 18 months as this oil shock works its way through the system, but if for some reason in the next 12 to 18 months we have more such episodes, that I think is a big worry, because that changes the regime from sort of the low and moderate inflation of the last two decades to a period of elevated inflation,” she said.
Despite those risks, Bahuguna said investors should not lose sight of the broader earnings backdrop supporting markets, noting that growth was no longer confined to the technology sector.
“Globally we are seeing pretty strong earnings growth. That earnings growth is actually beyond the tech sector. You’re seeing the second round effects of that tech sector earnings growth now moving into infrastructure, commodities, natural resources, as the demand for energy needs grows,” she said.
