What does Anthropic’s IPO reveal about the need for deeper diversification?

Anthropic, the company behind Claude, is gearing up for an IPO at a reported valuation of c.$1.3 trillion. If achieved, it would enter public markets among the world's most valuable companies from day one. However, for all the excitement surrounding artificial intelligence, the investment case remains far from proven.

Anthropic's latest financials illustrate the scale of that disconnect. In 2025, the company reported a net loss of around $42bn on revenue of roughly $4.6bn. Revenue then surged to $16.3bn in the first half of 2026, yet that figure was dwarfed by a staggering net loss of $80.7bn over the same period. Cost pressures are not set to ease any time soon, with hundreds of billions of dollars already committed to the buildout of computing infrastructure over the next decade.

The fact that a loss-making company is set to debut at a valuation of up to $1.3tn, in an industry that has yet to demonstrate a clear path to sustainable profitability, speaks volumes about current market dynamics. Size, narrative and index inclusion alone increasingly shape where capital flows, regardless of whether underlying fundamentals have fully caught up.

Anthropic's IPO serves as a timely reminder of how influential passive capital has become in shaping market leadership. It also reinforces an important investment principle: whenever larger sums of money are directed towards an ever smaller group of large companies, the value of deeper diversification only increases.

Market concentration is anything but new. The consequences of a dominant market narrative running rampant are well documented. At the height of Japan’s equity bubble in 1989, Japanese shares accounted for around 45% of the global stock market, ahead of the US at approximately 33%. The subsequent collapse devastated valuations, and the Nikkei did not regain its 1989 peak until 2024.

The dot-com boom offered another stark warning. Between 2000 and 2002, the Nasdaq fell around 78% as investors reassessed the prospects of businesses whose valuations had raced ahead simply because ‘.com’ featured in their name.

Today's market is different in important respects. Many of the companies attracting the largest passive inflows, including Nvidia, Amazon and Google, are established businesses with substantial revenues, strong demand and significant profits. That is not to say newer AI-focused companies such as Anthropic will not go on to create meaningful and long lasting economic value. They may well do, but for client portfolios, the promise of an investment story is not the same as diversification. No matter how compelling the narrative, concentration risk remains concentration risk.

The Magnificent Seven now account for around 36% of the S&P 500, up from roughly 10% in 2015. An investor who believes they own a broad spread of US companies may therefore find that their fortunes are heavily tied to a relatively small group of businesses, whose valuations and prospects are all subject to the same technological and economic forces. Diversification on paper can conceal concentration in practice.

Emerging markets are often included in portfolios to diversify away from developed-market equities. However the MSCI Emerging Markets Index has become increasingly exposed to the semiconductor industry and the AI investment cycle. Taiwan and South Korea together account for around 40% of the index, driven in large part by demand for semiconductors. Taiwan Semiconductor Manufacturing Company (TSMC) alone represents a double-digit share of the benchmark. Add in Samsung and SK Hynix and that’s over a quarter of the index in just three stocks.

Consequently, an investor who adds passively managed emerging markets funds to an already technology-heavy portfolio may be increasing their exposure to the very forces they intended to diversify away from. The issue extends beyond individual stocks or countries. Companies across different markets can be vulnerable to the same underlying drivers: AI spending, interest-rate expectations, geopolitical tensions and the availability of capital.

Deeper diversification requires more than spreading investments across geographical labels. It requires understanding what drives their returns – and whether those drivers are genuinely different. In an uncertain world, that distinction matters.

For an investor accumulating wealth over several decades, a market correction can be painful without necessarily derailing their plans. The powerful combination of time and pound cost averaging may help them recover. But for a retiree drawing an income from their pension, the picture changes entirely.

A sharp fall early in retirement can have lasting consequences when withdrawals continue. Selling investments to meet spending needs during a downturn leaves less capital available to participate in a subsequent recovery. The order in which investment returns occur can materially affect how long a retirement portfolio lasts. Concentration risks can make that challenge even more precarious. If a portfolio depends heavily on a handful of highly valued companies, a reassessment of their prospects can coincide with the moment a retiring client has least flexibility to wait for markets to recover.

Advisers cannot control market valuations, geopolitical events or the timing of a downturn. They can, however, question whether a client’s portfolio is sufficiently diversified and robust to withstand them – and crucially, whether its return drivers extend beyond the companies that dominate the index.

As part of the £138bn Prudential With-Profits Fund, PruFund has the scale and freedom to invest across a far wider universe than typical (UCITS) multi-asset funds. However well managed, those funds are largely limited to publicly traded equities and bonds. PruFund's structure allows it to go further – opening up sources of return that are harder to find elsewhere. This includes institutional-grade access to alternative and private assets, such as real estate, infrastructure, private equity, private debt, and commodities. However, diversification does not fully remove investment risk and PruFund remains exposed to market movements and other risks associated with its underlying investments.

PruFund’s portfolio reach spans around 40 sub-asset classes, implemented through approximately 80 individual investment strategies. Its approach to public equities is particularly deliberate. While passive funds invest on autopilot – meaning many will buy Anthropic regardless of valuation – PruFund's US equity allocation is more balanced, incorporating a fundamentally weighted strategy, based on measures such as earnings or dividends rather than market capitalisation. That means a stretched valuation doesn't automatically translate into a bigger holding. Combined with active management and a forward-looking approach to asset allocation, this approach aims to capture emerging growth opportunities across global markets without leaning too heavily on a few mega cap stocks.

Private markets tend to exhibit cash flows, valuation methods and economic sensitivities that are different to public markets, meaning they don’t typically move in tandem. That unlocks access to broader return streams that typical multi-asset solutions struggle to provide – offering the potential for real growth and inflation protection characteristics.

The opportunity is expanding too. More companies are choosing to stay private for longer, and much of their value is now created before public investors can get access. Anthropic is a case in point: it reached a valuation of around $965bn while still privately owned.

As more of tomorrow's investment opportunities emerge behind private doors, access becomes increasingly important. PruFund’s ability to combine daily liquidity with meaningful exposure to less liquid private assets is a combination that remains difficult for many investment solutions to match.

Add in PruFund’s proven smoothing process, which helps clients stay invested through volatile markets, and multiple layers of value align – helping advisers build resilience that can be clearly and confidently articulated.

This content has been prepared by the Life Investment Office (LIO). The views and opinions expressed in this article are those of LIO and not necessarily those of M&G plc. The information provided is for informational purposes only and should not be construed as investment advice.

Your clients' capital is at risk and they could get back less than they paid in.