Where the pros are investing beyond the Magnificent Seven

What should your investment portfolio look like in 2025? Even if your attitude to risk and your financial goals haven’t changed, it’s worth asking yourself that question at the start of each year. Focus in particular on the core holdings on which your investment strategy is built.

After all, market fundamentals can shift. In 2024, we saw most Western markets make the transition from high inflation and rising interest rates to a loosening of monetary policy. The geopolitical environment also looks very different – most obviously in the US, given the return of President Trump, but also in Europe where the French and German governments have collapsed. And the UK has seen its own political upheaval, with the election of the first Labour government for 14 years.

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Moreover, even if those changes leave you unmoved, there is a good chance that the portfolio approach you settled on a year ago is no longer the one that you’re actually now pursuing. Markets move unevenly, so the weightings you previously felt were appropriate will no longer be in place.

In particular, after the prolonged outperformance of the “Magnificent Seven” technology stocks – Alphabet Inc Class A (NASDAQ:GOOGL), Amazon.com Inc (NASDAQ:AMZN), Apple Inc (NASDAQ:AAPL), NVIDIA Corp (NASDAQ:NVDA), Meta Platforms Inc Class A (NASDAQ:META), Microsoft Corp (NASDAQ:MSFT) and Tesla Inc (NASDAQ:TSLA) – these shares now account for more than 20% of the MSCI World Index. If you’re investing through index tracking funds and exchange traded funds(ETF) – a good option for core holdings – you may feel over-exposed to those businesses.

One option could be a switch from a traditional tracker approach to an ETF that offers equal weightings – that is, it buys an equal amount of every stock in the index, rather than in proportion to each one’s market capitalisation.

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With these questions in mind, we asked six leading asset allocators and fund managers where they think investors should be looking for core holdings over the year ahead. Here’s what they said.

Nathan Sweeney, chief investment officer of multi-asset, Marlborough

“In the US, we’ve reduced exposure to mega-cap tech stocks in favour of large-cap and mid-cap counterparts. We expect these to fare better as central banks continue to cut interest rates. Nonetheless, looking to 2025, we expect tech to stay in the leading pack once the dust settles.

“Compared to traditional indices, equal weighting often tilts exposure towards mid-cap and small-cap stocks. These can offer significant growth potential, especially in periods of economic improvement and falling rates, as they tend to benefit disproportionately from cyclical upturns.

“The equal-weight approach also spreads exposure more evenly across sectors. This reduces dependency on the performance of a few large companies, creating a more robust profile for investors seeking steady returns.

“Historically, the S&P 500 US Equal Weight index has outperformed its market-cap-weighted counterpart in periods of market recovery or when valuations for mega-cap stocks are stretched. This makes it an attractive option for those looking to complement traditional US equity exposure.

“We moved to overweight UK equities in the third quarter of 2024, as valuations remain attractive. In addition, growth data has been improving, inflation reached its 2% target, and interest rate cuts have begun. We expect rate cuts to particularly benefit UK smaller companies.”

Stephen Tong, portfolio manager, Mid Wynd International Investment Trust

“The Magnificent Seven stocks doubled in value in 2023 and are up nearly two-thirds again this year in aggregate. It’s tempting to ride these winners a bit longer, but at what point do they run out of puff? The relative imbalance between these stocks and the rest of the market surely has to correct at some point. 

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“If you own a market-cap-weighted US index or a global index you are likely to have a very large exposure to these seven stocks now. They make up a third of the S&P 500 index and are heading towards a quarter of global indices. That means the relative risk-reward prospects are shifting significantly in favour of other names. 

“There is a good argument for locking in at least some of the gains you may have made if you have a lot of exposure to them in your portfolio. Look at opportunities elsewhere. We are finding plenty of quality stocks around the world that are leaders in their various fields, generating strong cash flow and attractively priced because they have been overlooked in the narrow US markets.

“Look for active global managers with a proven long-term record. Many of these have underperformed against trackers in the Magnificent Seven stampede of the past two years, but 2025 could be the year they return to form. When the rebalance comes it could be significant.” 

Jamie Mills O’Brien, co-manager, abrdn Global Innovation Equity fund

“We believe investors should look beyond the recent dominance of the US tech stocks when selecting where to allocate money in 2025. We think the exceptionalism of the Magnificent Seven is fading and what has been a very narrow market in terms of performance will broaden out.

“Although the Magnificent Seven now comprise around 35% of the US index and 20% of the global index, we think the theme of artificial intelligence (AI) is permeating far beyond the largest technology stocks to impact areas such as industrials, utilities and the consumer space.

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“We estimate that more than 30% of markets today represent a direct play on the theme of AI – as AI continues to proliferate and broaden, we think it will play a role in the reduction in concentration we have seen and which we expect to continue in 2025, as growth is also shared more equitably across markets.

“That ultimately does support more diversified portfolios, including exposure to the mid- and small-cap parts of the market, as well as geographic diversification. We see a number of markets outside the US showing strong fundamentals in 2025.

“By investing with a global active manager that is truly differentiating itself from passive indices, investors can gain access to these more overlooked areas of the market. That isn’t to say we are negative on US equities – we are not. Rather, we see the set-up for a less narrow market structure, across region and sector, in 2025 and beyond, in particular in the context of much of the outperformance of the US market having been driven by a very small number of stocks.”

Kishan Raja, investment manager, Hawksmoor Investment Management

“History shows us that an equally weighted index typically outperforms a traditional market cap-weighted one over the long term, although you have to go back more than 20 years to see this shine through for the S&P 500. We believe one of the best ways to view this is by observing the rolling five-year returns.

“There is nothing to say this period of outperformance led by the Magnificent Seven couldn’t continue, but this shouldn’t take light away from businesses that are still growing albeit at lower valuations outside the technology sector. For instance, we have exposure to the Premier Miton US Opportunities fund, which invests in US small and medium-sized companies, and we continue to remain assured in our exposure. 

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“We also continue to remain confident in the prospects of listed infrastructure, which can benefit from inflation linkage; infrastructure has a direct pass-through of inflation combined with stable and predictable cash flows over the long term. Infrastructure will also likely continue to remain the bedrock of economic growth that provides essential services to our daily lives.

“As multi-asset investors, our approach is to always ensure portfolios are diversified by manager, investment style, geography, market cap as well as other factors. We are therefore of the view that it is prudent to ensure we have exposure to the value factor.

“Investors only have to cast their memories back to 2022 when the MSCI World index suffered a drawdown of around 16% compared to the MSCI World Value index which slipped only 4%. And since 1974, the MSCI World Value index has compounded at 11.44% compared to the MSCI World at 11.08%.”

Jacob de Tusch-Lec, manager of Artemis Global Income fund

“Investors should focus on the risks that lie ahead in 2025. These are definitely heightened. Valuations in the US especially are stretched – rarely more expensive than today. And momentum stocks have done particularly well in 2024.

“Stuff that is up is up a lot, often with some elevated price-to-earnings multiples to accompany. That creates risks to market stability. We don’t see interest rates coming down far or quickly, which is a risk when you consider how much debt there is on government balance sheets.

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“We’ve been taking some profits in momentum names and positioned the portfolio for the realpolitik world of today, rather than the world we were living in during the decade leading up to Covid, or the world we wish we were living in. That means we have more exposure to defence stocks, banks, and capex beneficiaries. 

“We have just a third of the fund in US equities – half the weight of our global benchmark. As income investors we have been forced to be underweight on the Magnificent Seven stocks, which pay out little or no dividends. But we’ve shown they don’t have a monopoly on strong performance despite their sway over global indices.

“In 2024, our fund has beaten the world index by focusing on cheap lowly geared companies that pay a dividend and have high free cash flow. By not buying into very expensive valuations, you have a greater cushion of safety if economies slow.” 

Charles Luke, manager of Murray Income Trust

“One of the principal attractions of the UK market is that it offers investors both growth and value. In absolute and relative terms, the UK equity market screens as being under-valued compared to other regional equity markets and especially compared to the US.

“The opportunities to invest in companies with robust competitive positions and attractive long-term growth potential are plentiful. In particular, data-driven companies such as RELX (LSE:REL), Experian (LSE:EXPN), London Stock Exchange Group (LSE:LSEG) and Sage Group (The) (LSE:SGE) can benefit from the broad theme of digital transformation, while the enduring trend of emerging global wealth is a key driver for the likes of Haleon (LSE:HLN) and Unilever (LSE:ULVR).”