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Global
Global investing: Beyond the obvious
Jeremy Burge
Equity Portfolio Manager
Kathrin Forrest
Equity Investment Specialist

For advisor use only. Not for use with investors.


 


The only game in town?


That’s how a growing number of investors have come to view the U.S., its technology and communications sectors and the Magnificent Seven. Who can blame them? The U.S. has led all developed markets results-wise for years, the country’s tech sector continues to shine, and few investors need to be reminded what the Magnificent Seven (M7) have done this year. 


Why bother looking any further? 


For one thing, the makeup of the broad MSCI All Country World Index (ACWI) and S&P 500 Index have shifted meaningfully over the past 10 years, becoming increasingly concentrated. 


Within the ACWI, U.S. companies have grown from 47.5% of the index as of September 30, 2013, to 62.3% at September 30, 2023. A similar story can be told about sector weights in the S&P 500. The combined information technology and communication services sectors increased from 26.3% of the index to 36.3% from September 30, 2018, to September 30, 2023 (the communication services sector was only added to the Global Investment Classification System in 2018). The top 10 companies in the S&P 500 have likewise risen in weight over the past 10 years, from 17.7% to 30.6%.


The table shows the growth of select stock market index components over a 15-year period. The first component is the geographic weight of the U.S. in the MSCI All Country World Index. From September 30, 2013, to September 30, 2018, U.S. stocks grew from 47.5% of the index to 55.1%. Over the next five years, the geographic weight of the U.S. increased from 55.1% as of September 30, 2018, to 62.3% as of September 30, 2023. The second component measured is the combined sector sizes of the information technology and communication services sectors in the S&P 500 Index. The two sectors have increased in size from 26.3% as of September 30, 2018, to 36.3% as of September 30, 2023. No data is available for the percentage amounts of the combined sectors prior to 2018, as the communication services sector was only added to the Global Investment Classification System in 2018. The final component shown in the table is the weight of the top 10 companies in the S&P 500 Index. From September 30, 2013, to September 30, 2018, the top 10 companies’ weight in the index rose from 17.7% to 21.9% and continued to increase over the next five years from 21.9% as of September 30, 2018, to 30.6% as of September 30, 2023.

Sources: Capital Group, MSCI.

“These aren’t the same indices they used to be,” says equity investment specialist Kathrin Forrest.


Market concentrations of returns have meaningfully changed index composition, according to Forrest. Although she acknowledges recent areas of strength may persist, she says some investors may want to revisit today’s higher index concentrations to ensure underlying investment exposures are still meeting investment objectives, whatever they may be. 


“Ultimately, a core principle of portfolio construction is diversification, but today’s underlying market concentrations may be sabotaging this to some extent for investors,” she says. 


What’s the answer? 


“Going beyond the obvious to find more, better ideas,” she says. 


Tellingly, Capital Group Global Equity FundTM (Canada) had 49.7% of total net assets invested in the U.S. compared to 62.3% for the ACWI as of September 30, 2023. 


“Country allocations are a byproduct of our bottom-up, fundamental research and we continue to find a number of compelling investment opportunities with strong underlying growth drivers,” says Global Equity portfolio manager Jeremy Burge.


Top contributors


That may be best illustrated by Global Equity’s top 10 contributors to one-year results through October 31, 2023. Novo Nordisk and Eli Lilly, which rank one and two among contributors, respectively, are at the leading edge of innovation in terms of drug discovery; a key area that may support long term growth of capital. Microsoft and Meta are both re-accelerating in the face of new technologies, including AI and, in the case of Meta, the company has sharpened focus on cost control and capital allocation. 


In fact, Global Equity’s top 10 contributors for the period have a broad set of underlying drivers, whether you measure it by geography, sector, or company-specific considerations. These include improving industry cycle and structure dynamics for less-than-truckload shipper Saia, and a strengthened core business at Canadian financials company FairFax Financial. 


“What do these companies have in common?” asks Burge. “Not much at all, and that’s really underscoring the fund’s focus on finding diversified, differentiated sources of returns,” he says.


Another factor to keep in mind is that country of domicile may have little to do with a company’s revenues and earnings streams.


Two tables show the top 10 company contributors to results for Global Equity and MSCI ACWI for the one-year period ending October 31, 2023. In addition to showing individual company contributors, the tables also show how much they contributed, the Global Investment Classification System sectors they inhabit and their country of domicile. Global Equity’s top contributor was Denmark-based Novo Nordisk, in the health care sector at 1.41%. The second top contributor was U.S.-based Eli Lilly, also in the health sector, as it contributed 1.3%. The third top contributor was U.S.-based Meta, in communication services, which contributed 1.1%. The fourth top contributor was U.S.-based Microsoft in information technology, which contributed 1.0%. The fifth top contributor was Taiwan-based TSMC in the information technology sector contributing 0.8%. The sixth top contributor was Canada-based Fairfax Financial in the financials sector contributing 0.5%. The seventh top contributor was U.S.-based Applied Materials in the information technology sector contributing 0.5%. The eighth top contributor was U.S.-based Alphabet in consumer discretionary, which contributed 0.5%. The ninth top contributor was U.S.-based Broadcom in information technology with a 0.5% contribution. The tenth top contributor was U.S.-based Saia in industrials with a 0.4% contribution. In the second table, the MSCI ACWI’s top contributor was U.S.-based Microsoft in information technology at 1.4%. The second top contributor was U.S.-based NVIDIA in information technology at 1.2%.The third top contributor was U.S.-based Meta, in communication services, which contributed 0.8%. The fourth top contributor was U.S.-based Alphabet in communication services at 0.6%. The fifth top contributor was U.S.-based Amazon in consumer discretionary at 0.6%. The sixth top contributor was U.S.-based Apple in information technology at 0.5%. The seventh top contributor was U.S.-based Broadcom in the information technology sector contributing 0.3%. The eighth top contributor was Eli Lilly in health care at 0.3%. The ninth was Denmark-based Novo Nordisk in health care at 0.2%. The tenth was Taiwan-based TSMC in information technology at 0.2%.

Sources: Capital Group, FactSet.

“Is BAE Systems a British defence company?” asks Burge rhetorically in reference to a Global Equity holding. “No, 47.8% of its revenues came from the U.S. defence department in 2022. Is FairFax Financial a Canadian property and casualty insurer? No, 48.5% of its 2022’s revenue came from the U.S. Is Novo Nordisk a Danish pharmaceutical company? Again no, when you consider 47.8% of its revenue came from the U.S. last year,” he says.


Going farther, digging deeper 


In comparison, the broader market’s top six contributors over the one-year period to October 31, 2023, are M7 companies: Microsoft, NVIDIA , Meta, Alphabet, Amazon and Apple (Tesla, which rounds out the M7, didn’t make the cut). According to Burge, there may be reasons to own some of the M7 at times (Microsoft, Meta, and Alphabet were among Global Equity’s top-10 holdings as of October 31, 2023) but owning all of them all at once as a momentum play is short-term thinking.


“This is not a homogenous group,” says Burge continuing, “You’ve got a car manufacturer, a chip maker, two companies with large exposures to advertising dollars and a phone maker among them. If you're going to construct a portfolio, you've got to do it bottom-up using individual company research because buying all of them on momentum may only work until it doesn’t.” 


S&P 493


The level of concentration some investors may be exposing themselves to — particularly passive index investors — is worth considering. The M7 accounted for a staggering 130% of the index’s total return in the first 10 months of 2023 in U.S. dollar terms. In other words, without the M7, the S&P 493 would have posted a decline. That’s a remarkable level of potential risk packed into a handful of companies, particularly if the market environment takes a turn for the worse. 


While Global Equity’s investment decisions are based on fundamental, bottom-up research, understanding a company’s broader operating environment is critical. Currently, overall macro variables seem quite unsettled, whether that’s related to the path of inflation and interest rates, the interplay of monetary and fiscal policy, regulation, elections, or geopolitical tensions.


With that in mind, Global Equity looks to find companies that can do well in various  macroeconomic scenarios, including recession. Some of the individual company features that matter to Burge are strong competitive positions, resilient end markets and solid balance sheets that generate free cash flow. The key is managing the fund in such a way that it does what it’s supposed to do. 


All of which may lead to country exposures, sector allocations and top contributors that may be less obvious to some.



Jeremy Burge is an equity portfolio manager with 41 years of investment experience (as of 12/31/2022). He is also chair of Capital International Asset Management (Canada), Inc., part of Capital Group. He holds a bachelor’s degree with honours in economics from the University of Nottingham.

Kathrin Forrest is an equity investment specialist at Capital Group. She has 19 years of industry experience and has been with Capital Group for one year (as of 12/31/23). She holds a master's degree in economics from Wayne State University and holds the Chartered Financial Analyst® designation.


This content is confidential and designed for the exclusive use of registered dealers and their representatives. Canadian securities legislation, including National Instrument 81-102, prohibits its distribution to investors, potential investors or the general public. It is not intended to be a sales communication, as defined in the Instrument, and has not been designed to comply with its requirements relating to sales communications. 

 

Annualized compound returns as of October 31, 2023, including reinvestment of all distributions, for Global Equity Series A vs. the benchmark index: 1 year: 11.23% vs 12.46%; 3 years: 1.07% vs. 8.13%; 5 years: 6.95% vs. 8.67%; 10 years: 8.98% vs. 9.91%; fund lifetime (since November 1, 2002): 7.74% vs. 7.01%.

 

Annualized compound returns as of October 31, 2023, including reinvestment of all distributions, for Global Equity Series F vs. the benchmark index: 1 year: 12.46% vs 12.46%; 3 years: 2.19% vs. 8.13%; 5 years: 8.13% vs. 8.67%; 10 years: 10.20% vs. 9.91%; fund lifetime (since November 1, 2002): 8.92% vs. 7.01%. 

 

Equity attribution data was produced using FactSet, a third-party software system, based on prior calendar quarter-end publicly disclosed portfolio(s). Securities in their initial period of acquisition may not be included in this analysis. The analysis includes equity investments only and excludes forward contracts and fixed income investments, if applicable. It does not account for buy and sell transactions that might have occurred during the quarter. As a result, average portfolio weight percentages are approximate and the actual average portfolio weight percentages might be higher or lower. Data elements such as pricing, income, market cap, etc. were provided by FactSet. The index provided for attribution is based on FactSet’s methodology. The index is a broad-based market benchmark and may not be used by Capital Group as the sole comparative index for this portfolio. Capital Group believes the software and information from FactSet to be reliable. However, Capital Group cannot be responsible for inaccuracies, incomplete information or updating of information by FactSet. Relative contribution measures the impact a security has on the portfolio's excess return (the portfolio return minus the benchmark return). Past results are not indicative of results in future periods. All of the attribution data contained in the report that display the portfolio weights, benchmark weights and weight differences are average weights over the period.

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