Are we too focused on eurozone crisis?
The mantra ‘don’t forget about the 90 per cent’ should be used to remind fund managers to not spend too much time at the margins of their clients’ portfolios
It was not long ago that I discussed the problem of Apple constituting in excess of 5 per cent of the S&P 500.
It might or might not be fair to complain about this issue in relation to specific companies, but let us for a minute think globally. How much of the MSCI AC World is eurozone? My colleague Trevor Greetham recently reminded me that, in fact, it is only a mere 10 per cent of the index by market capitalisation.
This is important: while I do not dispute the fact that the level of globalisation does mean that problems in one area impact others, the extent to which we are focused on the eurozone and its (albeit substantial) issues is probably more the result of our geographical proximity and its headline-making attractiveness than pure rationality.
If 90 per cent of the global equity index is outside of the eurozone, we should not be spending all of our time worrying about the problems inside the eurozone, because the likely result is that we miss out on what is happening in the other 90 per cent, be it good or bad.
The human psyche has a fascination with extremes – we either want to be in a state of panic or a state of euphoria, (a statistician would tell you we have unstable equilibria) – and we can see this in markets at the moment.
In the US, short-term news flow aside, corporate profits are solid, and the S&P 500 index, despite recent declines, is comfortably up year-to-date. And coming back to Apple, no market in a state of fear rewards this sort of stock so highly.
Similarly, while there might be concerns over a possible “hard landing” in China, even the most pessimistic observer does not expect growth in China to go the way of peripheral Europe. Conversely, in Europe, the MSCI has declined back to near start of year levels and the outlook, in general, is far from rosy.
Macroeconomic issues aside, however, the principle I am outlining is important for investors – we tend to spend too much time on the margins of the portfolio rather than focusing on the key drivers of portfolio performance.
This is one of my concerns with stock-pickers: so many great fund managers are talented at stock selection, not macroeconomics, yet at times they become obsessed with calling the macro outlook – and sometimes bet their portfolio on being correct – when this is far from their core competency.
This is not to say that there are not great investors who understand the macroeconomic picture and use it as the basis of creating a portfolio – but it is to say that an investor should know his or her core competence and, broadly, stick to it as this is where their key skill resides.