From UK railways to US technology

Steve Thaxter- Senior Partner and Principal Adviser

Sovereign Wealth Partners



If you asked for a blend of global stocks, what should you expect?  Well of course it depends on how the blend is put together.


In recent years increasing proportions of institutional portfolios have been invested according to passive index rules, being the dollar value (market capitalisation) of each company within each share market.  Global index portfolios contain stocks from the largest companies in the world, weighted by market capitalisation. This type of investment is known as indexing and was pioneered by Jack Bogle of Vanguard.  Index rankings change regularly as stocks and sectors wax and wane in popularity.


What would an index fund have looked like in 1900?  Railway companies dominated every stock exchange then and the UK had the biggest – 24% of global market value.  Back in those days the US, Germany and France rounded out the industrial heavyweights.


How things change…these days a typical global index fund would comprise around 56% in US stocks, 7% Japanese 5% Chinese.  That’s two thirds of the portfolio allocated to stocks headquartered in just three countries.  Europe doesn’t rule the roost any more.  And railway stocks have had their day, they are relegated to a sub sector of the transport index, which itself is less than 2% of the global index.


It’s a reminder that nothing stays the same and most static portfolios quickly lose relevance.  One attraction of index style investment is that it faithfully reflects where the weight of money is today.   The index weightings change each quarter through a mathematical process to slowly bring forward stocks that have appreciated and relegate those that have declined.


Today, technology and communications stocks comprise the largest sector grouping having almost doubled in weighting over the last 10 years.  In fact, 13% of the global share market index is represented by just 4 tech stocks – Apple, Microsoft, Amazon and Google.  Every constituent of the global top 10 is headquartered in the US, so despite its challenges importance of the US market has never been more pervasive.


Whilst Australia is only 2% of the global market we can be forgiven a certain amount of home country bias in our portfolios.  According to the 2021 Credit Suisse Yearbook, the Australian sharemarket has topped the returns of the major countries since 1900, with a real return of 6.8%.  Nevertheless, global stocks provide great diversification benefits and access to industries with little or no footprint in Australia, like consumer technology, pharmaceuticals and robotic manufacturing.


Whilst we acknowledge the valuable role of index funds, at Sovereign we also seek to align portfolios with sources of FUTURE returns and diversification.  We observe increased crowding in some index driven investing, particularly in the US tech sector.  Parts of this sector appear to be in “bubble valuation” territory.  By design, index funds do not concern themselves with bubbles.  We seek to avoid them and not buy into overpriced assets.   In fact, in a recent move that seems a little “back to the future”, in our strategy portfolios we have increased our weighting to UK stocks, where the fundamentals of valuation, dividend and earnings growth look quite attractive.



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