Questions investors should be asking themselves

By Wesley Moodie, Financial Advisor at Reid Raetzer Robsons

With certain companies and markets brushing aside the recent COVID-19 pandemic as if it were just your common cold, there are certainly enough investors worldwide that are now breathing a sigh of relief in response to the recent market bounce. A favourite trade among global fund managers for many years now has been to pile into the US equity markets – and for local managers not only has this paved the way for investments into some of the biggest companies in the world, it has also served as a Rand hedge. To date this approach has given local investors phenomenal returns due to soaring US stock markets and a weakening Rand.

The question now remains, with companies like Microsoft and Amazon acting more like traditional safe havens in recent times, are those who remain invested in these companies being complacent by doing so?

The chart above represents the five largest companies in the S&P500 valued against the remaining 495 companies in that index. (The S&P500 representing 500 large companies in the USA and generally referred to as the American “stock market.”)

Just five American companies from the same sector now hold an approximate value of more than 20% + of the total value of the S&P500. While this phenomenon can continue for longer than most think is possible, it is certainly worth being cognisant of the fact that the last time US markets were as concentrated as they are now was shortly prior to a broad 80% decline in value across the very same sector wherein the concentration lies today: technology.

It may be time to take a step back and analyse your own portfolio and ask the following question:

Is your portfolio subject to concentration risk by either:

  •  Choosing different fund managers but not realising that they are all holding similar portfolios
  • Choosing an ETF/Index Tracker Fund to cut management costs but then substantially increasing allocations to just a few companies or sectors.

The market is always evolving and changing. Will your portfolio withstand these changes?


About the Author

Wesley Moodie is a Financial Advisor at Reid Raetzer Robsons and holds the Chartered Alternative Investments Analyst designation. In his former life he was a professional tennis player ranked in the top 100 in the world in singles and top 10 in the world in doubles. He can be contacted by clicking here: WESLEYM@RRIB.CO.ZA