Does Size Matter?


How well do you know your passive index investments? Did they have you at “diversification”? Or was it the ol’ “In order to find the needle, you need to buy the haystack” that stole your heart? Maybe the promise of “market performance” was enough to win your loyalty. All wonderful concepts, I must admit. But what if I told you that an x-ray of your passive index investments would reveal a beating heart that is actually comprised of….concentration??  Let’s explore.

“…all of the $35 trillion in wealth that stocks created over and above Treasury bills returns between 1926 and 2016 could be attributed to just 1,092 companies, or 4.3 percent of the nearly 26,000 stocks that have been traded in the markets. More than half of the $35 trillion came from just 90 companies, or less than one-third of 1 percent.”

The chart below depicts a recent example of a market trend that has been repeating itself for almost 100 years. Holding market losers strictly for diversification can create a serious performance drag on your long-term outcome. In other words, why pay for all that hay when you only wanted to own the needle?


Market Cap: FANG Performance Relative to S&P 500 with & without FANG*

(indexed to 0 on 12/31/2019 - Ends 01/31/2020)

*FANG stocks include Facebook, Amazon, Netflix, and Google (Alphabet), Both classes of Alphabet are included. 

Past performance does not guarantee future results. The performance discussion of individual companies and indexes is provided for informational purposes only and does not represent the TrueShares ETFs.  Investors cannot directly invest in an index.


Yes, it’s very true that actually finding the needle in a haystack on a consistent basis is extremely difficult, much like predicting the next “FANG”. But what if the size of the haystack was reduced? That just might help.

As of 02/10/2021 Source: https://www.theglobaleconomy.com/USA/Listed_companies/


It would seem that current market characteristics have created a scenario in which the chances of picking the next winners, the next “FANG”, have never been greater. Easier said than done of course, as we still need to find the needle(s). We’ve reduced the size of the haystack, now let’s concentrate on the tool. If you had the choice of a shovel, pitchfork or metal detector… which would you choose?

At TrueShares we believe that having credible, industry-specific experts with the relevant acumen and hands-on experience in their given fields is vital to capturing True, differentiated investment portfolios. Of course, fundamental stock picking and analytical skills are vital, but equally important is their ability to understand their thematic specialty. TrueShares believes that putting those highly differentiated skills together is how to outperform the market, or achieve alpha (excess returns earned on an investment above the benchmark return), by deciphering tomorrow’s winners. Our Portfolio Managers are our “metal detectors”.

So far, we’ve alleviated performance drag by not buying a bunch of that excess hay, and we’ve chosen our best tool to search with, our metal detector. The next challenge: can we actively find those winners, or needles, in time to capture their hyper-growth stages?

Let’s take Big Tech, for instance. It’s a “winner take all” segment. A manager’s ability to Truly understand the complexities and competitive advantage of a company’s underlying technology, along with the pain-point it relieves and how that impacts future earnings, is crucial to filtering out potential category winners.

We’ve all been smitten with diversified, passive investments at one point or another, and that’s not wrong. But we believe performance attribution and the true underlying nature of an investment is paramount to maximizing long-term returns. History has shown us repeatedly that an intelligent, concentrated strategy might just be your best chance to add some alpha to your portfolio, helping you find that needle without having to own all of the hay. It’s time to get back in that dating pool and find some winners, because there are a whole lot of losers in disguise out there that might just be holding your portfolio back.


ABOUT THE AUTHOR

 

MICHAEL N. LOUKAS

Principal & Chief Executive Officer

Mr. Loukas brings over 20 years of industry experience to TrueMark. Previously, Michael served as President and CEO of USA Mutuals, where he was directly responsible for executing the company’s strategic vision on a day to day basis. Mr. Loukas was also a founding Principal and CEO of WaveFront Capital Management in San Francisco, an institutional investment advisor that specializes in Emerging Markets and China. Over the course of his career, Michael has held similar leadership roles at several other alternative investment firms including Evolution Realty Capital, Thompson National Properties, the Kelmoore Investment Company, and Security Benefit. Mr. Loukas began his career with Morgan Stanley Dean Witter and also worked as an institutional equity salesman for CIBC Oppenheimer prior to moving into the registered investment company space. Mr. Loukas received a Bachelor of Arts in Government & International Politics with a minor in Economics from Bowdoin College.

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