Market Insights: Crowded House – Diversification Lacking within Large Cap Core and Growth Indexes
Source: FactSet. Data as of 11/30/2005-11/28/2025.
The Transformation of the S&P 500
Over the past two decades, the composition of the S&P 500 has undergone a dramatic shift. The Information Technology sector, which once represented a modest portion of the index, now commands 34.5% of its total weight as of November 2025—more than double its allocation from twenty years ago.
This transformation reflects broader economic changes, including the rise of digital infrastructure, cloud computing, artificial intelligence, and the dominance of mega-cap technology companies. While these secular trends have driven substantial returns, they have also fundamentally altered what investors mean when they refer to “the broad market.”
The Convergence of “Broad” and “Growth”
Perhaps most striking is how this concentration has blurred the lines between traditionally distinct market exposures. The S&P 500, long considered the benchmark for broad U.S. equity exposure, now increasingly resembles more tech-and-growth oriented indexes like the NASDAQ 100.
Active share—a statistical measure that quantifies the degree of differentiation between portfolio holdings—tells this story clearly. Twenty years ago, the active share between the NASDAQ 100 and the S&P 500 registered in the mid-to-high 80s, indicating substantial differences in composition. Today, that figure has declined dramatically, signaling a convergence that would have been difficult to imagine at the turn of the century.
In practical terms, investors who believed they were gaining exposure to different market segments by allocating to both indexes are now holding portfolios with significant overlap in their underlying holdings and sector exposures.
Implications for Portfolio Construction
This convergence creates meaningful considerations for portfolio construction and risk management. Many institutional and individual investors structure their equity allocations across style boxes—typically including both U.S. large cap core and U.S. large cap growth mandates. The implicit assumption has been that these allocations provide complementary exposures that together create a diversified equity portfolio.
However, as the boundaries between “core” and “growth” have blurred at the index level, the diversification benefits investors expect from this approach have diminished. Portfolios that appear diversified across multiple strategies may, in fact, be carrying concentrated exposure to the same underlying risk factors—particularly technology sector exposure and growth-oriented business models.
Concentration Risk in a Changing Market
The question facing investors is not whether technology companies deserve their market prominence—many have demonstrated remarkable business quality and growth. Rather, the question is whether portfolios are appropriately constructed to account for the concentration that now exists within broad market indexes.
Concentration can work in investors’ favor during periods when dominant sectors continue to outperform. However, market leadership rotates over time, and heavily concentrated positions can create vulnerability during periods of sector rotation or market stress.
The Case for Differentiation
Given these dynamics, investors may want to evaluate whether their equity allocations reflect the diversification they intend to achieve. This evaluation might include:
- Analyzing the actual sector and company overlap across their various equity mandates
- Assessing whether their portfolio construction assumes diversification benefits that may no longer exist
- Considering whether complementary approaches might better serve their long-term objectives
At The London Company, our investment philosophy emphasizes quality businesses, downside protection, and differentiated portfolio construction. We believe that in an environment where passive and traditional growth strategies increasingly converge around similar exposures, an approach that deliberately constructs portfolios with different characteristics may offer valuable diversification properties.
Our focus on business quality, reasonable valuations, and risk management aims to provide an equity solution that looks meaningfully different from tech-heavy, growth-oriented benchmarks. While we cannot predict future returns, we believe this differentiated approach positions portfolios to potentially weather various market environments.
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