Insights

An important rationale for building global equity portfolios is to reduce country-specific risks. A sensibly constructed equity portfolio will look to achieve adequate diversification across countries, sectors, industries, and business models. Instead of attaining such diversification, most portfolios today suffer from higher concentration levels. Specifically, most portfolios have a higher concentration of US equities and a higher concentration of US Tech.

High concentration to US equities. The chart below shows the weight of US equities within the MSCI All-Country World Index (ACWI). The ACWI is one of the most widely used “global” equity benchmarks. However, as the chart below shows, it suffers from one of the most extreme concentrations to a single country, the US. US equities account for about 63% of the index as of August 31, 2023. This is the highest concentration to a single country within the last four decades. Importantly, this is an extremely oversized allocation when we consider the fact that US accounts for just about 25% of the global GDP.

Source: August 2023, MSCI ACWI Factsheet, Sep 2015 to June 2023, ACWI ETF Factsheets, 2002 – 2015 estimated from chart from RB Advisors, and 1987-1997 Roberto Violi and Enrico Camerini

The previous such outsized country concentrations yielded poor investment outcomes. In the aftermath of the US Tech bubble, US equities generated poor results over the next ten years. A similar outsized concentration occurred in the late 1980s when Japanese stocks had a 40%+ weight in the ACWI. Japan at that time accounted for about 15% of the Global GDP. Again, investment results for investors in Japanese equities were rather unsatisfactory over the next ten years. Indeed, thirty-plus years later, the Nikkei 225 index still hasn’t exceeded its highs from 1989.

High concentration to US Tech. Within US equities, there is a significant concentration to technology companies. For example, a group of seven companies termed Magnificent 7 (Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla, and Meta) account for nearly 30% of the S&P 500 index.

Source: https://blog.rangvid.com/2023/08/27/7-or-493-stocks-what-matters-for-the-sp-500/

The chart below further highlights this concentration’s impact on the outcomes of broadly diversified portfolios in relation to their benchmark indices. As is seen, the largest seven companies within the S&P 500 were up a lot. On the other hand, the remaining 493 companies are flat year-to-date. As Mr. Slok concludes, “The bottom line is that if you buy the S&P500 today, you are basically buying a handful of companies that make up 34% of the index and have an average P/E ratio around 50.”

Source: Torsten Slok, Apollo Chief Economist

At MAEG, we construct broadly diversified and truly global equity portfolios. As we stick to our investment mandates, our portfolios continue to be highly divergent from the equity market benchmarks.