APRA data shows the typical super fund’s international listed equity exposure has nearly doubled since 2013, rising from 17 per cent to over 32 per cent. Within those international holdings, the US dominates, now making up a staggering 71 per cent of the MSCI World Index – up from less than half in 2011.
This trend has sparked debate about concentration risk. But the underlying drivers of that US dominance are not hype or blind optimism – they’re the exceptional earnings power of American companies, persistent investor confidence, and the structural realities of global indices.
Why the US remains dominant
First and foremost: earnings. American companies have consistently delivered stronger profit growth than their global peers. The US market is home to many of the world’s most innovative, successful businesses – technology giants, healthcare leaders, advanced manufacturers, and consumer brands with global reach. Despite the often chaotic political headlines out of Washington, corporate America has remained remarkably resilient and profitable.
That earnings leadership translates into higher market capitalisations – and therefore into heavier weights in indices tracked by many super funds.
Second, valuations have played a role. Investors globally have been willing to pay higher price-to-earnings ratios for US stocks because of their perceived quality and growth potential. In 2010, the US and the rest of the world had similar P/E ratios of around 18. Today the US sits closer to 26, while the rest of the world is around 17. That difference has helped expand America’s share in global benchmarks over time.
Third, the strong US dollar has also contributed. Equity indices typically measure market capitalisation in US dollar terms, so as the dollar has strengthened, it has naturally boosted the relative weight of US companies in global indices.
Can it continue?
Most industry observers think it can – at least for a while, though perhaps at a more modest pace. Super funds are likely to keep growing their offshore allocations as domestic opportunities become harder to scale. And many American companies still have promising growth prospects and dominant market positions.
That said, there are natural limits. P/E multiples and the US dollar can’t rise indefinitely. At some point they may stabilise or even become headwinds rather than tailwinds. But calling for an imminent collapse seems premature, given the underlying strength of US corporate earnings and the continuing innovation coming out of the US market.
A thoughtful allocation, not blind faith
Of course, it’s worth asking whether so much exposure to a single country is prudent. Concentration risk is something trustees and asset consultants need to weigh carefully. But the current high allocation to the US isn’t just the result of herding or laziness – it reflects a decade-plus of genuine outperformance by US companies.
Ultimately, the challenge for super funds will be balancing the need to capture those returns with the need to diversify meaningfully. It’s a nuanced debate that deserves serious attention – but it’s also one that needs to acknowledge why the US has earned its weight in global portfolios.
By Stephen Flegg, senior portfolio manager, AMP Super
