The S&P 500 a lesson in concerntration

article feature image

A recent article in the Financial Times highlighted the fund flows away from active funds to passive ETFs; last year, 500 billion dollars came from actively managed funds globally. Fund managers are struggling to outperform an index that is becoming ever more concentrated. Warren Buffet in 2021: “In my view, for most people, the best thing to do is to own the S&P 500 index fund”. To be fair, for many years, that would have worked very well. The rationale for Mr Buffet’s comment at the time was that the index tracks the performance of 500 large U.S. companies. It includes value and growth stocks from all 11 stock market sectors, covering 80% of domestic and 50% of global equities by market value. I wonder if that will still be his advice.

To give you a little breakdown of the impact of a meteoric rise in a small number of stocks has had on the All Country World Index and the S&P 500. The top 26 stocks in the S&P 500 now represent more than half of market value; the last time it was close to this was 1999—70% of MSCI ACWI represented by the S&P 500, not the 50% Mr Buffet referred to in 2021.  The top 10 stocks account for more than 25% of the AWCI, and only one is a non-US company. Investors do not realise the concentration risk they now have in a small number of highly valued stocks when they buy an S&P 500 ETF today. One of the rules of an investment portfolio is diversification of risk; that’s not so much the case today when buying the S&P 500.

While we are on the subject of assets that have had a meteoric rise in the past few years, I am, of course, talking about Bitcoin. There is an old stock market saying that you know when the stock market has peaked when you get tips from the cab driver. Well, this week, I received a text from a gardener. He asked what I thought about Bitcoin, as he had received a tip to buy the cryptocurrency. Should he open a Revolut account, as apparently, they provide a simple way to buy the asset? You saw the article we wrote on trying to analyse the potential value of Bitcoin; it came out between $1250 and $5m. I have no idea where Bitcoin will peak and its actual value, but when you start getting messages like that, it makes you wonder whether the bubble is closer to bursting.