Artificial intelligence (AI) has become one of the defining investment themes of this decade. As we outline in our recent H2 2026 Market Outlook, AI continues to present compelling long-term opportunities as it evolves from hyperscaler capital expenditure (capex) to infrastructure buildout and widespread commercialisation. For investors, the key question is how to build a portfolio around AI. With market concentration being a key point of contention in both Australia and the US, portfolio construction has become just as important as individual stock and theme selection.
Diversification Means Looking Beyond Today’s Winners
The Magnificent Seven have dominated headlines and driven a significant share of recent market returns, yet the AI opportunity extends well beyond today's largest technology companies. As AI adoption accelerates, demand continues to spread through semiconductors, networking, power infrastructure, industrial automation, software, energy infrastructure and data centre providers. Our H2 2026 Market Outlook highlights that AI is transitioning from a capex story towards commercialisation, expanding the opportunity set well beyond the companies leading today's market.
The same principle applies across equity markets. US indices have become increasingly concentrated in mega-cap technology companies, while Australian indices remain heavily influenced by banks and miners. Many investors assume broad market exposure provides meaningful diversification, yet when they look under the hood, they are bound to see a heavy number of names concentrated in the top holdings.
History suggests market leadership evolves over time. Many of today's largest businesses were themselves small and mid-cap companies a generation ago. International small and mid-cap (SMID) companies continue to trade at attractive relative valuations despite maintaining healthy profitability, strong balance sheets and solid cash flow generation. Expanding portfolios across company sizes, sectors and geographies provides exposure to a broader range of businesses positioned to potentially benefit from the next phase of AI adoption and economic growth.
Growth Still Matters but So Does Valuation
AI remains one of the most compelling structural growth themes in global markets, but questions of market frothiness are beginning to emerge. Strong investment themes do not eliminate the importance of valuation. Companies with exceptional growth prospects can still produce disappointing investment outcomes when expectations become excessive. Investors building robust portfolios should remain focused on identifying businesses capable of delivering sustainable earnings growth without paying increasingly demanding multiples.
This is where Growth at a Reasonable Price (GARP) becomes particularly relevant. The investment pendulum has long swung between growth and value, yet investors need not stand at either extreme. Some of the most compelling opportunities lie in businesses that combine both characteristics. GARP seeks companies combining improving earnings, quality fundamentals and sensible valuations. As highlighted in our H2 2026 Market Outlook, this balance has historically delivered attractive risk-adjusted returns while avoiding many of the valuation extremes associated with pure growth investing.
Owning structural growth themes while maintaining valuation discipline allows investors to potentially participate in long-term innovation while relying on improving company fundamentals, rather than multiple expansion alone, to drive returns. In the short term, market sentiment and investor psychology often drive prices. Over the long term, earnings growth and company fundamentals do the heavy lifting.
Fortifying Portfolios by Building Multiple Sources of Return
Reducing concentration risk involves more than simply owning more stocks. It requires building portfolios with multiple sources of return. Diversification across countries, sectors and company sizes helps reduce dependence on a single part of the market. Diversification across investment styles broadens the drivers of portfolio performance. Income-producing assets and real assets such as commodities introduce additional sources of return that can strengthen portfolio resilience across changing market environments.
As we discuss in our H2 2026 Market Outlook, dependable income is once again becoming an important portfolio building block. Bank credit, covered call strategies and high dividend equities can complement growth allocations by providing income streams while helping offset periods where AI-related equities experience heightened volatility. Likewise, commodities can provide portfolio diversification through a different return profile, particularly during periods of inflation or geopolitical uncertainty.
Rather than relying on a handful of companies or a single investment style, investors should seek portfolios where structural growth, valuation discipline, dependable income and liquid alternative assets work together to create a more balanced outcome across different market environments.
Building Portfolios For The Next Decade
AI is likely to remain one of the defining investment themes of the next decade. Successful portfolio construction, however, extends beyond identifying the strongest structural trend. Investors who broaden exposure across the AI ecosystem, diversify beyond today's largest market leaders, maintain valuation discipline and combine multiple sources of return place themselves in a stronger position for the next phase of the market cycle. We continue to believe AI deserves a core place in long-term portfolios. The challenge for investors is ensuring the rest of their portfolio is positioned to participate in the opportunities AI creates, while remaining resilient across whatever market leadership comes next.
For a deeper discussion on navigating concentration risk and building resilient portfolios for the decade ahead, explore our H2 2026 Market Outlook: Three Views on a Complicated Market.
