Speaking at the InvestorDaily Asset Strategy Forum 2017 in Sydney yesterday, Arnhem Investment Management head of global equity SMA Theo Maas warned about sector concentration.
“The conventional wisdom about diversified global strategies is that you buy a global fund or ETF and off you go – you’re diversified,” Mr Maas said.
But most investors fail to realise that 30 per cent of global equity indices consist of banks and resources – the types of sectors Australians ought to be diversifying away from, he said.
There is a very high correlation between Australian banks and their global counterparts, said Mr Maas – and the correlation between domestic and international resources stocks is almost one-to-one.
“The problem was even worse during the GFC. They all went down at the same time,” he said.
“Investing in global equities is pointless unless Australians are getting exposure to sectors – and growth areas – that are not available domestically.
“We know that there is a lack of growth int he Aussie market. So if you do go for global you will typically look for growth, because it’s hardly available here.
“If you blend the Arnhem way of doing it with your existing Aussie equity portfolios, you typically end up with a lower risk profile. Which makes sense, because you’re not investing in correlated sectors around the world.”
Specifically, Arnhem looks to invest in technology and healthcare stocks in the US – but Mr Maas avoids the five ‘FAGAM’ stocks (Facebook, Amazon, Google, Apple and Microsoft) that are dominating the index.
Mr Maas, who lived through the dotcom bubble of the late ’90s, said the current technology boom is “nothing like what happened in 1999”.
“This particular sector at the moment is driven by a handful of [FAGAM] stocks and ‘unicorns’ [such as Snapchat] that are priced at ridiculous valuations,” he said.
However, the “vast majority” of US tech stocks are trading on sensible valuations – and the sector as a whole is simply “an industrial sector with higher growth rates”.
