Swiss equities: rethinking diversification in a concentrated market

However, beneath the surface lies a structural challenge that is often overlooked: concentration risk. The indices commonly used as benchmarks for the Swiss equity market – the Swiss Market Index (SMI) and the Swiss Performance Index (SPI) – are based on marketcapitalization weighting, which creates significant cluster risks in terms of both individual stocks and sectors. In an era where passive investing and index replication are increasingly popular, this risk has grown and can pose a substantial challenge for long-term portfolios.

The risks aren’t really hidden – they stem from high concentration. Like many major indices, the SPI – widely regarded as the reference index for Swiss equities – is weighted by market capitalization. This leads to major imbalances: currently, just three companies – Nestlé, Roche, and Novartis – account for roughly one-third of the entire SPI. This concentration isn’t new, but its impact is becoming increasingly significant.

For institutional investors such as pension funds that often use the SPI as a benchmark, portfolio performance depends disproportionately on the fortunes of a handful of companies and sectors.

Imagine an unexpected regulatory shock or supply chain disruption affecting one of these dominant businesses. The impact would ripple through the entire index, causing losses that diversification could have mitigated. In other words, what appears to be a diversified Swiss equity allocation is, in reality, a concentrated bet on a few companies.

The market-cap weighting of the most prominent Swiss equity indices ignores one of the oldest principles of investing: diversification. The rise of passive strategies exacerbates the problem because they replicate index weights by design, embedding concentration risk into portfolios. For long-term investors, this creates a paradox: the very investments intended to deliver stability may harbor systemic risks and fragility. Moreover, markets are not static. Structural changes – such as technological shifts, geopolitical tensions, or demographic trends – can alter sector dynamics in ways historical data cannot predict. In such an environment, relying on market capitalization as a weighting basis becomes increasingly questionable.

Swiss equity exposure should therefore be reconsidered. Instead of accepting concentration as inevitable, investors can adopt alternative weighting approaches that prioritize risk dispersion over the dominance of large companies, reducing dependence on a few mega-caps. By limiting exposure to individual stocks and broadening sector coverage, these strategies aim to restore the essence of diversification: resilience to the unexpected. A portfolio that caps the potential loss from any single company is inherently better equipped to withstand shocks and associated absolute losses.

Traditional indices like the SMI and SPI, where a few mega-cap companies dominate index composition, pose significant cluster risk for institutional investors. To proactively address these risks, AllianzGI employs an alternative yet proven methodology used in the Swiss Equity COVA Index (SACI^®). Scientifically developed in 2008 and applied to institutional mandates since 2009, SACI^® aims to achieve greater diversification of stock- and sector-specific risks. It deliberately deviates from market-cap weighting, using a more equal-weight, tiered approach.

Based on SACI^® methodology, AllianzGI has managed the Allianz Diversified Swiss Equity fund since December 10, 2025. The fund consists of a well-diversified portfolio of approximately 75 Swiss companies, systematically selected from the SPI universe. Management follows a semi-active approach, combining the discipline of a rules-based framework with the flexibility of active implementation – allowing responses to market specifics (trend breaks, IPOs, dividend payments, spinoffs, liquidity constraints) and proactively addressing inefficiencies such as small-cap and year-end effects.

With a long-standing track record of success, SACI^® aims to minimize the loss potential of individual securities and ensure resilience against unforeseen events. By combining systematic diversification with tactical adjustments, such a portfolio seeks stable long-term participation in the Swiss equity market and, through broader diversification, aims to reduce sustainable value loss, better protecting investors from unpredictable negative events tied to large index weights.