When examining the structure of global equity markets today, one feature stands out above others: concentration has become a defining characteristic of benchmarks well beyond the US. The conversation typically starts and ends with the Magnificent Seven – understandably so – these tech giants alone currently account for ~35% of the S&P 500. The attention this garners, however, obscures a broader and more important point. 

Look further afield and the same dynamic surfaces: the top 10 holdings represent 36% of the MSCI AC Asia Pacific ex Japan Index, and roughly 35% of the MSCI Emerging Markets benchmark – a region where investors often assume they are gaining broad country and sector diversification. Semiconductor manufacturing company TSMC alone accounts for 14.2% of that benchmark – a weight broadly equal to the combined share of Nvidia and Apple in the S&P 500.

We believe this is the structural consequence of market-cap weighting that investors must confront: capital flows toward what has already become most valuable. When market leadership is diverse and valuations are rational, index exposures are a useful mechanism for broad exposure. When just a handful of companies drive the majority of returns, they can become a conduit for concentrated risk that does not announce itself at the allocation level. In our view, investors who believe they are diversified by investing in an index may be carrying a far narrower set of exposures than they intended – and that is a risk worth examining carefully.

The SpaceX IPO is a striking example of how index inclusion can force buying at any price, regardless of underlying fundamentals. At the time of writing, the company’s valuation has even eclipsed Amazon’s – despite reporting a $4.9bn loss on roughly $18.7bn of revenue last year. What investors are really being asked to buy is not current profitability, but a vision: ambitious, capital‑intensive projects spanning satellite infrastructure, AI and even future orbital data centres. That may ultimately prove justified – but in the near term, it highlights how passive flows can amplify valuations built more on expectation than on earnings.

We want to be clear: none of this is an argument against index investing. In the deepest and most efficient equity markets, index exposure remains a disciplined and cost-effective tool – and we are not in the business of dismissing evidence that challenges our own convictions.

The evidence against active manager outperformance in certain markets is sobering. According to Morningstar’s year-end 2025 Active/Passive Barometer, just 17.2% of active US large cap growth managers outperformed their passive peers in 2025, with a ten-year success rate of only 3.6%. In US large cap blend, 32.1% beat passive in 2025 and 8.1% over ten years. We take these figures seriously. They do not lead us to abandon active management – but they do reinforce our conviction that index investing has a genuine role in the right parts of the portfolio and that you need to select highly skilled active managers to outperform.

Where we push back is on the assumption that index investing is a single, uniform choice. It is not. Market-cap weighting is one methodology among several – and, in our view, the one most exposed to the concentration dynamics we have described. Whilst there is a place for this methodology, we believe there is often a compelling case for alternatives: fundamentally weighted indices, which determine position sizes using financial metrics rather than market value, reduce reliance on the biggest names. More equally weighted approaches redistribute exposure away from the top of the benchmark. In our approach, the type of index exposure we take on is a deliberate active decision that we make.

Our view is that active management earns its place where market inefficiency is greatest – where dispersion is wider, information advantages persist, and skilled managers can translate genuine insight into return. That environment has strengthened considerably. Geopolitical fragmentation, elevated policy uncertainty, and sharply divergent outcomes across regions and sectors have made the opportunity set more uneven than broad indices suggest – and we are positioned to take advantage of that.

The data supports our conviction. Again, Morningstar's Barometer report highlights that diversified emerging markets equity managers posted a 64.1% one-year success rate in 2025. In fixed income, the picture is more nuanced by year, but active US investment grade corporate bond managers achieved a ten-year success rate of 52.2% – a meaningfully different story from US large cap equities, and one that aligns with our own experience managing these allocations.

Fixed income is where we hold our strongest conviction for active management. Benchmark construction in this asset class is fundamentally ill-suited to passive replication: weights are driven by issuance, not quality, meaning the largest positions accrue to the biggest borrowers rather than the most attractive credits. In addition the turnover is high making replication itself challenging. Beyond these structural flaws, we believe that skilled credit analysis – identifying short-term mispricing with the confidence that well-underwritten positions will be repaid at maturity – can generate more consistent outperformance in fixed income than in almost any other asset class. This is not a theoretical position; it informs how we have constructed and managed these allocations within PruFund.

Implementation is not an afterthought in how we build and manage PruFund. It is central to how we think about diversification – ensuring that what we own reflects deliberate choices about risk, not the unexamined consequences of a benchmark default.

We are however acutely aware of the difficulty of identifying consistent outperformers. However, we believe three structural features of our approach meaningfully tilt the odds in our favour:

The proof is in the pudding. Over the last three years, our active public market strategies – each benchmarked against an investible index alternative we could have chosen instead – have comfortably outperformed on an AuM-weighted basis. That is the outcome our approach is designed to produce.

We can't predict the future. Past performance isn't a guide to future performance.

We believe the gap between an allocation label and what it actually delivers has rarely been wider. Higher concentration, greater regional and sector dispersion, and the growing weight of private assets in long-term portfolios have each made implementation a more consequential variable. In a simpler market environment, these decisions could be treated as secondary. We do not think investors can afford to treat them that way today.

The answer is not to favour one approach over another by default. It is to be deliberate – to ask, for every part of the portfolio, where each approach earns its place and how they can be combined to build something that is genuinely diversified across sources of risk, not merely diversified on paper. That discipline is at the heart of how we manage PruFund – and it is why we believe implementation matters now more than ever.

This content has been prepared by the Life Investment Office (LIO) for information purposes only and does not contain or constitute investment advice.