Advising through concentration risk and hyperscale hype
The ‘how much is enough’ question was cascading through your writer’s mind last week, and not for the usual saving-for-retirement reasons. You see, dear reader, the 2026 Meet the Manager event, hosted at the Sandton Convention Centre, Johannesburg, offered nine 30-minute-long asset manager presentations in a single day. This is probably every independent financial adviser’s dream scenario; but it presents coverage challenges for us reporting types.
The fog of war and volatility
To make things fair, yours truly drew a number to settle on which presentation to report on. The winner was a discourse titled ‘Through the fog: Where market uncertainty meets opportunity’. It was an apt title, given how the fog of war and haze of volatility is affecting portfolio returns through the first half of 2026. Jarrod Cahn, lead manager of the Credo Global Equity Fund, took to the podium to make sense of the macroeconomic backdrop, and how core macro factors overlapped with the fund’s investment process. He also shared some investment ‘tips’ with the usual caveat that what follows should not be construed as financial / investment advice.
“We start today with the big talking point; the tentative peace treaty with Iran,” he said. To be fair, this on-again-off-again deal has been through a few more cycles since, with the latest-latest being the 15 June announcement of a deal to cease all military activity. Cahn noted some surprise at how financial markets and oil prices had responded to the 28 February 2026 action taken by the United States and Israel against Iran, saying that he would have expected markets to plummet 20-30%, and oil to trade north of $150 per barrel. Instead, “oil prices held up amazingly well” while the markets were pushing up against all-time highs.
The financial advisers among FAnews’ readership are quite familiar with the domino effect of higher-for-longer oil prices. At US$90 per barrel, inflation builds, creating pressure on interest rates and weighing on economic growth. Local consumers have already seen the double-whammy of inflation, with the Statistics SA April 2026 CPI print at 4%, and interest rate hikes, courtesy of the Reserve Bank’s 25 basis point hike on 28 May. Fund managers, meanwhile, are concerned that the emerging ‘higher for longer’ interest rate environment has not yet transmitted through to the equity risk map.
Headwinds for growth and value styles
Developed market concerns centre around constrained economic growth; earnings fragility; geopolitical uncertainty; liquidity tightening and unprecedented concentration risk, to name a few. “The top 10 mega caps are dominating the market, [meaning that] passive investor flows are reinforcing momentum rather than fundamentals,” Cahn said. He pointed out that the US S&P 500 was more concentrated now than at any point in its modern history, with almost all of its recent gains coming from a thin ‘slice’ of AI infrastructure names.
This backdrop has proven a headwind for value-based investment methodologies, and for growth managers not fully exposed to the narrow slice of AI infrastructure winners driving index returns. Micron Technology Inc. was offered as an example of how missing the gains in a single share can derail a value-style fund. Micron, which has gained 154% year to date, contributed 10% to the S&P 500 index returns despite being only 1% of the index weighting.
“We do not own it, so we have underperformed,” explained Cahn. To make matters worse, the concentration risk in the S&P 500 is massively theme-linked. Ten stocks account for 40% of the S&P 500, with all but one exposed to the AI infrastructure build-out. If the build-out loses momentum, hyperscalers’ valuations will fall, triggering a sell-off as passive funds correct their exposures.
This discussion about hyperscalers played out just days before South Africa’s Elon Musk became the world’s first dollar trillionaire, in principle and on paper at least, and back when a few hundred billion was still considered a lot of money. Jokes aside, dear reader, it is reported that Amazon, Google, Meta, Microsoft and Oracle have committed around $805 billion in 2026, rising to $1.1 trillion in 2027, for AI-related capex. But it remains unclear whether this capital, largely sourced from free cash flows, will generate an adequate return on investment (ROI).
The $500 million token paradox
Research by Panmure Liberum, published in the Financial Times, hints that “only Amazon clears a positive return hurdle on the most generous assumptions” for 2025-2030. Cahn said the hyperscalers would have to grow their combined revenue from around $1.6 trillion today to around $6 trillion over the next three years just to generate a 10% ROI on the forecast AI capex. He also warned of the so-called ‘token paradox’ in which early AI adopters realise that mounting AI costs are exceeding both cost savings and productivity gains. One company reportedly burned through $500 million in Claude tokens in a single month.
Under the headline ‘reasons to be cautious’, investors were treated to the 12-month blended forward PE ratios for the MSCI World Index versus MSCI World Growth and Value Indices. The MSCI Growth PE of almost 26 times was described as “pretty excessive” whereas the MSCI Value PE of 15.5 times has not benefited from the broader market rerating. According to Cahn, his fund’s slight outperformance versus the value index was largely due to its ‘quality’ overlay. Ironically, this is the same overlay, which meant the likes of Micron were ignored.
Some quality, value shares
The presentation concluded with an overview of a handful of quality, value shares the fund manager felt worthy of inclusion in its portfolio. Again, this is not financial or investment advice. First up, Honeywell, which was presented on a “sum-of-the-parts valuation” view. The fund manager argued that the pending separation of the business into three separate parts focused on automation, aerospace and advanced materials, would unlock value over the coming 12 months, keeping in mind the expected spin-off date of 29 June 2026.
Second, the familiar Microsoft, which was described as an unbelievable business. The company was talked up on the basis of its current PE ratio of around 22 times being unjustifiably low. “You can effectively buy Microsoft, a premium business, at the same valuation as the market,” Cahn said. The sense is that the company will resolve its OpenAI concerns over the coming two years; that the SaaS sell-off on the back of the AI theme has been overdone; and that the uptake of Copilot would be better than expected based on the brand’s market penetration.
Global equities for the sweet of tooth
Third, for those afflicted by a sweet tooth, the fund manager shared two companies that might outperform as cocoa prices normalised. Cahn singled out confectionery and snack leader, Mondelez, and US chocolate manufacturer Hershey as likely beneficiaries of cost efficiencies through the recent cocoa price boom and normalisation. “Their margins have been crushed; if you take a view that there is going to be some kind of mean reversion, we think that we can get to quite interesting returns on these stocks,” he concluded.
Writer’s thoughts:
Concentration risk should be a familiar topic for local advisers, given the JSE’s historic skew towards Naspers / Prosus and, more recently, the outsized impact of gold and platinum miners. How do you balance the appeal of passive trackers with the concentration risk problem? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
