UK pension funds are cutting back their exposure to US equities, amid concerns over the market’s growing concentration in a small number of tech stocks and the risk of a bubble in the AI sector.
Schemes managing more than £200bn in assets for millions of British savers told the Financial Times they have been shifting allocations to other geographical regions or adding protection against a potential fall in stock prices in recent months.
The moves come as the tech-heavy Nasdaq Composite index has shot up more than 20 per cent this year — and more than doubled since early 2023 — driven by the so-called Magnificent Seven stocks such as Nvidia, Alphabet and Meta.
This has fuelled concerns about the market’s growing concentration in a small number of stocks and the risk of a bubble that could leave retirement savers exposed to a sharp sell-off.
“We recognise the specific risks associated with US equities, such as tariff measures and the concentration in large tech stocks,” said Callum Stewart, head of investment proposition at Standard Life, part of the Phoenix Group. It oversees the £36bn Sustainable Multi Asset fund serving 2mn members, where roughly 60 per cent of its equity assets are in North America.
Stewart said the fund was in the process of reducing its allocation to US stocks and is instead boosting exposure to UK and Asian markets.
The UK’s defined contribution pension sector, in which employees, typically with employer support, build individual retirement pots, is especially sensitive to potential stock market swings because younger savers are often heavily invested in US indices, which are dominated by the so-called Magnificent Seven.
Savers 30 years from retirement typically have 70 to 80 per cent — or even 100 per cent — of their assets in global equities, with most equity allocations dominated by US Big Tech.
“The concentration in US tech, combined with valuations that are high both historically and relative to other sectors, is drawing closer attention to the risks this poses for members,” said Neil Maines, senior consultant at investment adviser XPS.
Aon Master Trust, a £12bn scheme with 185,000 members, sold about 10 per cent, or roughly £700mn, of its global equity portfolio over the summer, much of it US stocks. Since inception a decade ago, the fund has put 100 per cent of its members’ savings into equities during the early stages of their plans.
Jo Sharples, chief investment officer, said the fund had cut its equity allocation “to take advantage of an opportunity in the gilt market” but added that “with all the talk of an AI bubble, cutting our equities exposure has taken the edge off some of those risks”.
She added that a market correction was “one of those risks that we are thinking about more and more”, although she did not believe “we are in bubble territory yet”.
Fidelity, overseeing the £23.9bn FutureWise fund, said it had not reduced US equity exposure but had focused on protecting members nearing retirement by shifting US equity exposure towards “more stable” companies, while also “adding gold for risk hedging, and shortening bond duration”.
“We’re embedding stronger downside protection within this US exposure to offset emerging risks — particularly in tech,” Fidelity said.
Nest, a £58bn state-backed workplace pension scheme, has US equity exposure of around £17bn. Chief executive Mark Fawcett said the fund was directing new pension contributions towards private markets rather than selling existing US equity holdings.
“We are diversifying away from those big tech stocks,” he said. “It’s impossible to say this tech boom is a bubble, but it’s our job to manage risks, and we’re doing that through diversification.”
The moves come as global institutions have warned that equity markets are increasingly susceptible to a sharp correction, particularly given the dominance of a small number of stocks. As at the end of October, the Magnificent Seven accounted for around one-quarter of the MSCI World index.
The European Central Bank last week said valuations of US tech stocks such as Nvidia, Alphabet, Microsoft and Meta had become “stretched”, as investors were being driven by a “fear of missing out”.
The Bank of England and the IMF have recently issued similar warnings, highlighting that high AI stock valuations leave portfolios especially exposed if optimism fades.
However, some pension fund managers are reluctant to cut their allocations to US Big Tech companies, given their continued strong performance and the fear of missing out on further large gains.
Despite being around $4.3tn in size, Nvidia increased its chip sales even faster than Wall Street had expected in its latest quarter, underscoring the strength of the global AI investment boom. Its shares have doubled since their April low.
Border to Coast, a £65bn local authority fund, has reduced its holdings in some AI names but has overall slightly increased its US equity exposure.
“We see the competitive landscape changing for AI,” said Will Ballard, head of equities.
“As a result, over the last few quarters we have been gradually reducing our investment in Nvidia and Oracle, balancing it with an increase across companies which we see as beneficiaries of the changing innovation and competitive landscape, namely Broadcom, AMD and Google.”
Richard Saldanha, global equity portfolio manager at Aviva Investors, recently said he was “comfortable” holding Big Tech positions, noting that almost 60 per cent of US tech companies now pay dividends, compared with 20 per cent in 2005.
Dan Mikulskis, investment chief of the People’s Partnership, provider of the £38bn People’s Pension fund, said investors had a tricky investment decision when faced with high valuations but strong earnings growth.
“The debate is around how you reconcile these strong forces,” he said. “For now, we have no imminent plans to change allocation.”