What is an index, what are the risks, and why does active management matter? In this episode of Bridge talks Business, Wealth Management Adviser Gareth Stythe talks with Ryan Bridge about how some of the widely followed indices have become more concentrated, with technology stocks making up a larger proportion than ever before. They discuss the implications for investors, and how employing an active investment strategy can help to mitigate some of these risks.

Click here to download the MP3 file or listen to the podcast on your favourite platform:

Bridge talks Business: 4 Aug 2026
Episode Transcript

Ryan Bridge

Kia ora and welcome to episode 87 of Bridge Talk Business with Milford. Today we’re doing a deep dive on index funds. This is where you chuck your money into an investment fund that tracks the performance of an index, like the NASDAQ, the Techone or the S&P 500. Instead of trying to pick winners by selecting particular stocks or bonds to buy, a manager will buy a bunch of stocks listed on an index and follow their growth. It’s supposed to mean automatic diversification, but there is no guarantee there. Gareth Stythe from Milford is in studio to explain. First, here’s your top five.

    1. The US Federal Reserve left interest rates on hold, but there were three dissenters in favour of a hike. In the press conference, Chair Warsh, once again, gave very little away.
    2. Partly in response to the lack of guidance from the Fed, long-end bond yields in the US rose to their highest level in almost 20 years, and shares sold off.
    3. Big tech stocks reported last week, Microsoft, Amazon – doozies. Standout profits driven largely by their cloud businesses, shares in these companies rising sharply at the end of the week, helping shares recover into month-end.
    4. Away from the US, Australian inflation data came in softer than expected. Still remains above target – thanks oil.
    5. This week, investor focus on US payrolls, where the labour market is expected to show continued resilience. We also have more company reporting, and we have quarter two labour market report for New Zealand.

Right, this week we are sitting down with Gareth Stythe, Wealth Management Adviser at Milford, because we want to talk about index funds. Don’t worry, we’re going to explain what they are in case you don’t know. But also, a lot of people have this perception that index funds are automatic diversification. Is that necessarily true? That’s the question we’re asking today. Just a reminder, this segment is informational only and should not be considered financial advice. Gareth, welcome back.

Gareth Stythe
It’s great to be here. Thanks.

Ryan Bridge
Now, last time we spoke, you mentioned your daughter, Carys, who’s a Silver Fern, is a Silver Fern, so presumably she was over in Glasgow.

Gareth Stythe
Yes. Yeah. And they just won the gold medal in the Commonwealth Games, and yeah, I’m super proud. Me and my wife are just so proud of her and everything she’s managed to achieve. So yeah, it was a great tournament to watch, and everyone in that team did so well. It was such a good game, the final.

Ryan Bridge
Proud dad.

Gareth Stythe
Yeah, very proud indeed.

Ryan Bridge
Well, Dame Noels knows how to pick a winner and that’s kind of what we’re talking about today. So, we’re talking about an index investment fund. Index funds. What are they, and how do they, in theory, help you with diversifying your portfolio?

Gareth Stythe
Yeah, so an index is really just a group of companies, and it allows you to see how that group of companies is tracking. So one index that’s widely followed is called the Morgan Stanley Capital Index, and it’s one that includes all countries, and it’s a very big index. So fund managers like to use this index to see how they’re tracking.

Ryan Bridge
This is global?

Gareth Stythe
Yeah, it’s global. So it has a huge number of countries that it’s in, about two and a half thousand different companies that it tracks. So it’s a very broad index, but there has been some increase in concentration in the information technology sector and the communications sector. So those are two very similar areas for businesses, and that weighting of those types of companies has increased from around 30% of the index a few years ago to about 40% now. So quite high levels of concentration that you might not be aware of if you were just blindly following a passive index.

Ryan Bridge
Right, which is what a lot of people do on the assumption that if I’m following an index or I’m in an index fund, which is following a broad one, I’ve got a diversified portfolio. What you’re saying is that there’s a bit of creep going on with particular sectors taking over these indices.

Gareth Stythe
Yes, exactly, exactly. And the increase in the concentration has been sort of notable, but also there’s been the amount of returns that are being generated from this index – over the last six months or so – has come from one sub-sector of that index. So artificial intelligence requires a lot of computing power. And so the companies that have been making the computer processes, so there are memory chips in particular, those companies have been increasing their earnings because the demand for those chips has been really high. So they’ve been able to increase their prices and the amount of returns for those stocks, in particular, has been incredible. You know, some of them have gone up by 800% over the past year. So the returns have come from one sub-sector of this particular index. So it’s concentration within concentration. And that does have some risks that I could go into.

Ryan Bridge
Yeah, well, this is what I wanted to get to. So, I mean, returns – good, companies performing well – good. Investment returns – good. But what is the risk with having? I suppose there’s too many eggs in one basket type situation.

Gareth Stythe
So I think that the main risk comes from – this was sort of discovered in the late 1800s by a chap called Francis Galton. And he was looking at the heights of people. And he noted by doing statistics and monitoring lots of different parents and their children, that tall parents tend to have tall children, but they tend to be slightly shorter than their parents. And I was interested in this when I started reading it, because my daughter’s obviously very tall. And short parents tend to have short children, but they tend to be slightly taller than their parents. And so this creates this regression to mediocrity or reversion to the mean. So if we go back to the stocks that we’re talking about, they’ve had a very good run of earnings. There’s been a lot of capex spent on them. And it’s above normal what we’re seeing. So there could be, in that case, a return to a reversion to the mean that I don’t know what might happen. But when you see things like this, there’s often a return to mediocrity or return to more normal sort of environment.

Ryan Bridge
I’m sitting here still trying to figure out who’s the short kid. So you mentioned a return or a correction, which is 10 percent or more off a recent high, right?

Gareth Stythe
Yeah.

Ryan Bridge
The South Korean Index has been going gangbusters recently because of Hynix and Samsung, the two big companies there. They have come off the boil last week. Their index came back down. It was in correction territory at one point. Is that a good thing? Does that tell you that if we have lots of small little regressions, then we won’t have a massive slump?

Gareth Stythe
Yeah, I think that that was a good thing. In the case of South Korea, it’s like a microcosm of the global environment. So South Korea, those two big companies, they make up a huge portion of the South Korean Index. And as you say, they had been performing exceptionally well. You know, their earnings had been going up. And so investors just tend to pile into that sort of area.

Now, a lot of retail investors in Korea, they had been borrowing money to invest in these companies and they were sort of slightly over their skis in terms of how much risk they were taking. And just around the recent results that these companies had, there was some nervousness that was that was created and created a little bit of selling. And that sort of fed off itself because people who’ve borrowed money, they have to sell when things start going down.

Ryan Bridge
They’ve got a limit.

Gareth Stythe
Yeah, apparently Goldman Sachs said about 3.6 percent of adults in South Korea received a margin call, which is when the bank that looks after their trading account says you have to sell these shares now because you haven’t got enough money in your account to cover the losses that you’re making. So, yeah, it’s just a microcosm of a more global sort of index. And I think it shows that having some form of active management like Milford does, really provides a bit more stability and oversight than simply investing in an index of funds.

Ryan Bridge
So, if there was an active manager at Milford, how would that differ from just putting your money into an index? So what is the difference?

Gareth Stythe
Well, one thing, obviously, we know the construction of these indices and what the weightings are. So we can be underweight whatever the level of the index is in information technology. The other thing that we can do is – and we do do – is trade around the peaks in the troughs. So we get regular updates. I’m an investment adviser at Milford. So I talk to clients, but we get updates from the fund managers regularly and know what they’ve been doing. And recently, they’ve been saying during this sell off, they’ve been just topping up their exposure to some of the internet-based companies and the semiconductor companies. So they can trade around those peaks and troughs, invest a bit more in the troughs and take a little bit off the top in the peaks.

And the other thing that we do is while there’s a lot of focus on one particular sector, other sectors become unloved and their security and they become undervalued. So we’re finding some good value in other areas such as health care and utilities. And those companies are providing good levels of cash flow and good earnings. And yeah, their time in the sun will come too.

Ryan Bridge
Fantastic. Gareth, lovely to have you back on the show. Please pass on our congratulations to your daughter. What a fantastic result.

Gareth Stythe
Thanks for having me. Yeah, great to chat.

Ryan Bridge
That was Gareth Stythe, Wealth Management Adviser at Milford talking to us about index funds. Just a reminder, you can like, follow and subscribe this podcast wherever you like to listen. We love you doing so. Until next week, don’t forget to invest in yourselves.

Missed previous episode? Don’t worry! Click here to catch up now.