Given concentration risk, understanding what a strategy and portfolio owns is more important than ever in current markets. Todd Rosenbluth, head of research, VettaFi, hosted a discussion with Columbia Threadneedle’s Jay McAndrew and Capital Group’s Jacob Gerber. The trio discussed valuations in the current market and the difference that active selection makes during Vettafi’s Equity Symposium.
“You have to beware of bifurcation,” cautioned Jay McAndrew, head of strategic beta sales, Columbia Threadneedle. McAndrew likens current markets to a Tale of Two Cities, given equity concentration.
Concentration is top of mind for advisors, and it’s a time when valuations really matter. McAndrew explained that from mid-August, the p/e ratio of the S&P 500 was around 19. Meanwhile, the top mega-cap companies currently trade with a p/e of around 27. Removing those from the index, McAndrew explained that the S&P 492 trades around 16 p/e.
“We’ve had lots of conversations with advisors that’s really about ‘help me rebalance back to a more normalized p/e to better protect what I’ve earned,’” said McAndrew.
Jacob Gerber, equity and multi-asset investment director, Capital Group, took it one step further. Gerber explained that an equal-weight S&P 500 strategy is around 15 p/e. Just three sectors currently trade with valuations about the S&P 500 itself.
Yet another way to consider this stark division is through the lens of dividend-paying companies.
“The top quintile dividend payers are trading at a twenty-five percent discount relative to the rest of the S&P,” Gerber revealed. “Historically they trade about twelve percent.”
In an environment of positive real rates for interest rates looking forward, diversification becomes even more important. It allows for better capture as more companies participate and potentially perform from the bottom up.
Active Management Offered Two Ways
There exists a wide permutation of equity strategies so that advisors and investors can best capture positions that reflect their outlook. For those investors seeking a cumulation within their equities, volatility proves beneficial. However, for those investors looking to decumulate their equity exposures, volatility can prove challenging.
It’s the kind of broader environment that benefits active strategies and active management. By utilizing active management, investors can capture returns and volatility beyond market cap constraints.
“If you’re thinking about above-average income for investor needs, you’re going to have to fish in a different pond,” Gerber said. “I think a hundred percent active… ETFs allow for differentiated tools in your toolkit.”
Columbia Threadneedle is an active firm that takes the perspective that intentional thoughtfulness on assets included in a benchmark as well as their weighting makes a marked difference in return potential.
The firm offers the Columbia Research Enhanced Core ETF (RECS ) seeks to recreate the Russell 1000 but only includes companies that Columbia Threadneedle rates as buys or strong buys. “We’re trying to reduce the deadweight drag of the kitchen sink approach,” McAndrew explained.
The fund has outperformed the Russell 1000 by 110 basis points and the S&P 500 by 70 bp on an annualized basis. It currently excludes some of the high-valuation mega-cap companies.
Valuations in Dividends and Abroad
Capital Group offers the Capital Group Dividend Value ETF (CGDV ) that focuses primarily on the U.S. The fund seeks to invest in undervalued assets compared to their intrinsic value. “We try and find these companies that are undervalued relative to future prospects,” said Gerber. The fund also seeks “to provide an income stream at a premium to that of the S&P 500.”
CGDV invests largely in investment-grade, dividend-paying companies. It contains some contrarian positions and offers the potential for better performance when markets fall while participating on the upside as well. Gerber explained that the majority of the fund’s assets currently lie within the industrial sector.
Also covered was the Columbia EM Core ex-China ETF (XCEM ) which allows for EM investing while excluding China exposures. It’s an ETF that has gained popularity recently, given geopolitical tensions as well as China’s underperformance this year.
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