We believe that’s wrong. The differences in performance between countries’ equity markets largely comes down to sector exposures. Whether a result of historical accident, different listing rules, or tax treatments, every equity market is different, tending to be dominated by one or two large sectors.
The US, for example, is dominated by technology stocks, due to the magnetic draw of Silicon Valley and the promise of easy financing. But those companies – Apple, Facebook, Google and so on – have a reach that far exceeds the US. To like the US market you have to like the prospects for technology companies.
However, the UK market is global banks and oil companies, with no technology worth mentioning. Emerging markets have lots of financial sector exposure alongside a large consumer sector, but precious little in the way of industrials or healthcare.
Digging deeper
The financial industry is still working with outdated tools. Investors aren’t looking at sectors, so providers don’t create products.
When we build our asset allocations, we take these limitations into account. We know about our tools – the regional indices, and their various biases. Our strategic asset allocation process implicitly and explicitly considers sectoral exposures as well as regional ones. We end up with portfolios which are structurally distributed across global sectors, which feeds into our tactical decision-making.
We can invest in specific sectors – healthcare for example. Or we can tilt our portfolios towards regions with sectoral exposures that we believe are appropriate, such as our ‘COVID recovery’ basket, which tilts portfolios towards the cyclical sectors in Europe and Japan.
At 7IM we don’t think our clients’ capital should be run in particular ways just because convention says so. Instead, we look for a robust and repeatable process that sees the world for what it is rather than in terms of outdated traditions and tools.
Find out more about the products based on our Strategic Asset Allocation, including our Pathway Model Portfolio range at 7im.co.uk.
Ben Kumar, Senior Investment Strategist
