For investors looking to maintain their exposure to North American equities without lugging the magnificent seven around, the equally-weighted index can look an appealing proposition.
Not long ago, we covered the subject in depth – discussing whether this product can in fact solve those much-discussed concentration risk concerns prevalent at the upper end of the S&P 500.
Out there on the ground, it is a tale of two cities.
Charles Stanley has held the S&P equal-weight index since late 2022, steadily increasing their position until such a point that it now comprises 25 per cent of their overall US exposure.
“Part of the reason why we’ve introduced this allocation is that the idiosyncratic risk within the headline index has increased a significant amount over the past two years,” said Benedict Tottman, portfolio manager at Charles Stanley.
“And so this is just simply trying to reduce some of that single-name exposure within our portfolios.”
Is this a widely-held view among the DFMs we cover?
Not massively.
Last time out we discussed that demand for equal-weight was relatively soft, with Tam and 7IM two of the predominant players in the space while most allocators opt to sit it out.
Over at Albert E Sharp, for instance, partner James Crocker is staying well away.
“To go equal-weighted means avoiding the things you're scared of rather than having conviction in the things that you're attracted to,” he told Asset Allocator, somewhat philosophically.
He said that this method implies that every single stock will go up and makes sure you don't get killed by one or two in the process, which is not a view he subscribes to.
For Crocker, gaining exposure to the magnificent seven has been gaining exposure to ‘some of the best companies that have ever existed on the planet’, which has worked out well for pretty much everyone involved so far.
What the product looks like in practice is a 13 per cent weighting to the IT theme, as opposed to the S&P 500’s 33 per cent. But much of the other sectoral comparisons look pretty similar – for instance, financials, healthcare, consumer staples, and communications are weighted almost equally in both strategies.
The equal-weighted index also rebalances every three months, cutting its winners and growing its losers.
In the last few years, pretty much any factor-esque strategy that’s de facto underweight the tech giants has underperformed (see sustainable funds, small-caps, and value stocks), though this of course may be ripe for reversal.
Tottman, however, doesn’t mind the difference in make-up.
“I'm still comfortable with 500 names in the index split equally,” he said. “There's still a very good level of diversification within that index. Obviously, it skews some of the factor exposure in the sector slightly differently, which is, for us, not a bad thing.”
