Diversification is investing 101. The theory of not having all your eggs in one basket, spreading the risk, and hoping that if some of your investments do fall on any given day (or year) others will be rising.
Applying diversification to the US market can be tricky. A diversified US equity portfolio will include a wide range of sectors. But a small clutch of sectors dominate the economy and stock markets.
Alec Murray, head of equity client portfolio managers at Amundi US, says: “By far the most dominant sector in US large-cap core equities is technology. The consumer sector is also a large sector within the US markets, while financials, health care and industrials are also prominent.”
In recent years, this has created problems for those seeking to invest in a diversified way in the main US markets.
Ayesha Akbar, portfolio manager at Fidelity International, says: “The composition of the S&P 500 has changed considerably, given the growth of a handful of technology stocks,” creating a “lack of breadth”.
This in turn has driven interest in small-cap indices like the Russell 2000, she adds, “which tend to have a more diversified range of sectors represented”.
Portfolio composition
Columbia Threadneedle’s view is the best way to build a diversified US portfolio, with predictable and consistent returns, is through being relatively sector and factor neutral.
Andrew Smith, client portfolio manager for US equities at Columbia Threadneedle, explains: “Given the past few years have been characterised by often sharp factor rotations and changes in style leadership in the market, we try and minimise this volatility by operating ‘blend’ portfolios, picking the very best growth and value ideas from across the spectrum.”
The aim, he adds, is to generate steady positive performance from bottom-up stock selection, “rather than from camping out in a particular style like growth or value where we are more susceptible to being swung around by market rotations”.
Another issue to consider in a balanced US equity portfolio is how the strength of the dollar impacts it.
Eric Papesh, portfolio specialist for US equities at T Rowe Price says: “Investors need to understand the specifics of the individual businesses within their portfolio. You not only need to know where their sales occur, but what their cost base looks like as well.
“Are the revenues and expenses in the same currency, or is there a mismatch between the two? Does the company hedge their FX exposure, or are they exposed to fluctuations in exchange rates?”
Opportunities
In terms of opportunities in US equities right now, Smith is looking for companies with improving fundamental characteristics, “where that future improvement is under-appreciated by the wider market and not fully embedded in the current valuation”. Stocks like Coca Cola, Microsoft, Hilton and Vertex are among those he is excited about.
