Marquette Associates warns of IT, Asia concentration in emerging markets; offers DFA, MFS as diversification options

Patrick Wing of Marquette Associates spent the bulk of the July 23 meeting reviewing data that show the MSCI emerging-markets index has become heavily concentrated: a small number of IT-related companies and Asia country exposure now dominate the benchmark. Wing said the top holdings represent a large share of the benchmark and warned of the risk if those names fail to meet elevated expectations.

"We're talking about 40% of the benchmark is in 10 stocks," Wing said while pointing to the table of top holdings and a pie chart of country weights. He drew a contrast between the current IT/Asia-dominated index and the marketcomposition 15—120 years ago, and argued that modest active exposure could reduce the plan's vulnerability if leadership in the benchmark shifts.

Wing compared two active options: DFA (a very broadly diversified, factor-driven strategy holding thousands of securities, lower weighted average market cap, and lower fees) and MFS (a blended quantitative and fundamental approach holding roughly 80—150 stocks, with a history of stronger short- and intermediate-term stock selection). He showed historical excess-return and tracking-error tables and recommended a capped active allocation (the board's general guidance is to limit active exposure to about 5% of the portfolio; the recommendation here was ~2% in the emerging-markets sleeve). Board members seized on the risk-management rationale and indicated a preference to keep most exposure passive while adding a small active sleeve.