The concentration risk in global stock indexes that has built up during the strong rise over the past year must now be a key consideration for global investors, according to Vihari Ross.
It has been a great year for parts of the market but the dominance of the so-called Magnificent 7 in global stock benchmarks has caused a great deal of concentration risk and the valuation of some large US “quality” companies, including AI and weight-loss stock, has stretched.
While that may have caused some active fund managers to underperform the market at times, investors need to look elsewhere for better risk-adjusted returns, according to Vihari Ross.
The Antipodes Partners portfolio manager will reveal her Sohn Hearts & Minds stock tips at the prestigious conference in Adelaide on November 15.
While Antipodes does have shares in some of the tech giants, Ms Ross won’t be telling attendees to load up on these market darlings after their spectacular rise in the past two years.
The S&P 500 has risen 33 per cent in the past 12 months, mostly driven by a 50 per cent gain in the so-called Magnificent 7 index of tech giants. Nvidia has soared over 200 per cent in that time.
But while the AI boom shows no sign of stopping, the sell-offs associated with the TMT bubble and the Nifty Fifty era show what can eventually happen when valuations are too stretched.
“We’re in a stage of the market now where we where it’s obviously become very concentrated,” Ms Ross said. “It’s concentrated in the US and it’s concentrated in a small number of tech companies.
“When that level of concentration happens, it doesn’t last.”
Ms Ross was previously head of research at Magellan Financial Group. She designed the Core International portfolio for Magellan and also covered the financial and consumer sectors as an analyst during her 15 years at the global fund manager.
As a high-conviction value investor, Antipodes aims to profit from situations where markets overreact to unexpected change so as to build portfolios of attractively valued, quality stocks. Its focus is risk-adjusted returns, in order to protect against unexpected volatility and drawdowns.
Global equities offer the potential for higher returns and reduced risk via diversification.
But BofA has estimated that the Magnificent 7 now make up nearly one-third of the S&P 500’s entire market capitalisation and have accounted for about 50 per cent of its return so far this year.
“As value managers, we ask where the overvaluation is and where the opportunity is,” Mr Ross said. “Because whenever these concentration peaks dissipate, the expensive stocks fall and there’s also a broadening out of broadening out (of performance) in cheaper stocks.”
To gauge this “value dispersion”, Antipodes compares the price-to-earnings multiples of the cheapest versus the most expensive stocks in its investing universe. “That value dispersion is really wide right now, which means as much as people say there’s a whole bunch of really expensive stocks out there, there’s actually a lot of value opportunities out there as well,” Ms Ross said.
In terms of locating the overvaluation in global equities, she says it’s concentrated in larger US companies, and also the quality and growth “factors”, as opposed to that value factor.
An obvious cause of the concentration in quality companies – which typically have high cash flows – was the massive rise in interest rates since the Covid-19 pandemic. But that has now peaked.
“That’s exactly the right question, because quality is not just about big cap tech companies,” Ms Ross said. “We own shares in some of those companies and we will continue to have exposure. Some of them are certainly overvalued, but the broader large cap, US, quality, expensiveness, isn’t necessarily all about tech. There are many other companies that have just rerated massively.”
Health care is a good example as the share price performance of weight-loss drugs has seen the likes of Eli Lily and Novo Nordisk parallel that of the AI-fuelled surge in Nvidia.
“There’s this sort of singular success being ascribed to one or two companies here in the same way as AI, and you’re going ‘hang on, competition is coming’, Ms Ross said. “Unfortunately many overweight people in the US can’t afford these drugs and nor do they have access to them. Many things need to fall into place, even without the competitive dynamics, such as people coming up with oral solutions, people coming up with solutions that don’t make you feel sick.”
It comes as Viking Therapeutics said that higher doses of its experimental pill increased patients’ weight loss beyond earlier formulations, strengthening its case to eventually compete with blockbuster shots from Novo Nordisk and Eli Lilly. Shares of Nasdaq-listed Viking have quadrupled this year as investors bet that it will crack the market for obesity drugs that’s estimated to hit $US130bn ($197bn) by the end of the decade.
Easy-to-administer pills are expected to have a big impact as an alternative to injections that now dominate the market, Bloomberg reported.
“One of the things that we really care about at Antipodes and a key part about how I invest is thinking about change,” Ms Ross said. “That’s really important in the context of what is quality, because if you have a business that is high quality, or you think this is high quality, and I’m going to set that view in concrete, and that’s it, what actually matters more is not that initial view, it’s actually what’s going to happen next.”
That means looking five to 10 years ahead, for the change that could take place in the industry, or an individual company, in order to understand that winners and losers are going to emerge.
It could be a cyclical shift or a structural shift that disrupts the current leaders.
“We can misjudge those because they happen fast, or they happen exponentially, or they happen slowly at first and then happen fast. It’s almost part and parcel of tech and healthcare,” Ms Ross added.
“They have to keep disrupting the status quo”.
The 2024 event will explore themes including space, AI, geopolitics, biosciences and investing. All profits will be donated to medical research.
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