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The US equity market made it through the choppy waters of early 2020, but’s it far from being on an even keel. Five months on from the lows, index performance continues to be tilted by tech stocks.
As SocGen points out, the three-month tracking error of 495 stocks in the S&P 500 – when compared with the index itself - currently stands at some 3 per cent, versus a historic average of 1 per cent.
The other five stocks that are pushing the index higher are, needless to say, the FAANGS. Other acronyms are available: replacing Netflix with Microsoft is an increasingly common practice when judging tech outperformance this year.
But in a finding that couldn’t be further removed from prevailing wisdom, Goldman Sachs analysts say US mutual funds are currently running their largest underweight to the tech sector since at least 2012. The reason for that is nonetheless a plausible one: this underweight is solely down to Apple and Microsoft’s increasingly significant benchmark weightings.
The pair accounted for more than 12 per cent of the S&P 500 at the start of this month, and have extended their gains over the index in recent weeks. That, as we’ve discussed before, makes it difficult for active managers to overweight the pair.
Absent those two stocks, and the average mutual fund is overweight the sector by 1.5 percentage points. But Goldman says Amazon – counted by S&P as a consumer discretionary stock rather than a tech company – is also an underweight position for the typical manager. It too now accounts for 5 per cent of the index. And while many of the US equity funds favoured by DFMs will have material exposure to these shares, the continued rally will make it ever-more difficult for these strategies to deliver an impressive return versus the index.
What this year’s rally has done is finally convince more wealth managers of the merits of dedicated tech strategies.
Of course, this only exacerbates the problem described above: with Apple, Amazon and Microsoft now accounting for more than 36 per cent of the Nasdaq, it’s impossible for active managers to overweight these stocks within a Ucits portfolio.
Nonetheless, many DFMs are still going down the active route. And it’s not just tech that’s caught their eye: healthcare has been another winner in 2020.
In both cases, that’s been of benefit to the likes of Polar Capital, which has solidified its position as a go-to provider for specialist equity portfolios – even as its mainstream strategies, which often have a value focus, start to fall from favour.
But with the rally proving so rapid, and tracker funds not constrained by the same rules on stock concentration as their active peers, it’s unsurprising that many fund buyers have gone down the passive route for such exposures. And the big winners on this front have been iShares (unsurprisingly), and also the likes of L&G. The latter’s Health and Pharma tracker has been picked up by a few discretionaries in recent months, and its infrastructure and real estate offerings have attracted the attention of those now warier of direct exposure to real assets. Whether these passive plays prove to be long-term options or just temporary additions remains to be seen.
When will investors start to fret over sterling again? The pound moved back above the $1.30 mark earlier this month, though that’s mostly down to dollar weakness rather than anything else. More pertinently, there’s little sign of any worries for the moment about the (next) cliff-edge Brexit deadline at the end of the year.
It’s unlikely that such an outcome is priced in yet. Wealth managers will know by now that traders’ anticipation of economic disaster unique to the UK tends to prove rather helpful for returns – when it comes to the global portion of their portfolios, at least. All the same, with risk son the horizon, there’s reason to think UK equity weightings might take another leg down before too long.