Despite the economic turmoil caused by the coronavirus pandemic, 2020 was a banner year for the S&P 500. But this is in part due to a relatively small number of companies carrying disproportionate weight and investor attention, both in the U.S. and abroad.
Last September, Alphabet, Amazon, Apple, Facebook, and Microsoft—the index’s five largest companies—represented nearly 25% of the S&P 500 index, contributing in an outsized manner to its gains. While the index has outperformed for at least a decade, experts don’t expect such outsized gains to last.
“We suggest that it’s imperative that people look outside of the S&P 500,” says Dave Iben, Kopernik Global Investors’ chief investment officer and lead portfolio manager. “It’s a great index, but so much money has poured into it over the last dozen years that it’s not left a lot of bargains behind.”
He says investors should look into countries and sectors underrepresented in the S&P 500: Almost half of the global equity market is outside the U.S. and emerging markets aren’t universally present in investor portfolios.
Christopher Baucom, managing director of investment consulting at Ascent Private Capital Management, thinks of the S&P 500 as a single basket—and investors never want to put all their eggs in one basket.
He notes that there have been periods when international stocks have outperformed the S&P 500. And historically small-cap and mid-cap stocks have outperformed the index—though not over the last 10 years, he says.
“We’ve had an unusual period of extremely low inflation, kind of modest growth, and really low interest rates, and we don’t want to necessarily just bet that that is what is going to play out over the next 10 years,” he says.
That’s why it’s important to diversify equity exposures beyond what’s worked during this period. He says it makes a case for international diversification, emerging markets, equities, and incorporating active and passive investing strategies.
Although recent media reports about GameStop and Reddit’s investor communities have portrayed investing as exciting, that message is the opposite of what Baucom’s trying to convey.
“I would say we’re not trying to make it exciting,” he says. Instead he’s more concerned with making sure investments compound over long time periods, at a premium to inflation to build real value.
Penta spoke with Iben, Baucom, and Neil Nisker of Our Family Office to get some tips on how investors can set their sights on the world beyond the S&P 500 index.
Consider Alternative Asset Classes
“If you want to make money over the long-term, you need a balanced portfolio in other asset classes other than just stocks and bonds,” says Nisker, co-founder, executive chairman and CIO of Our Family Office. His multi-family office invests in asset classes like private equity, private credit strategies, and special purpose acquisition companies (SPACs).
He says investors shouldn’t expect stocks to behave as they have in the last decade, particularly younger investors who haven’t experienced losses in the ways their grandparents or parents have.
Nisker adds that for high-net worth clients, alternative asset classes can offer a premium. “There’s something called an illiquidity premium—that you get a much, much better return for being in investments like private equity and farmland or timberland, where you can afford to have liquidity once a year or once every five years.”
Baucom adds that with good managers, real estate can be a good investment option. “As e-commerce is growing, industrial real estate is pretty attractive,” he says.
Become an International Bargain Hunter
“Right now, a lot of the bargains we’re finding are in asset-rich companies,” Iben says. “Companies that own materials, their own gold, or own energy and natural gas, uranium.”
Looking at good companies in the U.S. and comparing prices with international counterparts offers excellent investment opportunities going forward, he says.There are opportunities to get better dividends and stronger valuations across the board, from “an arguably equally good company.”
Iben cites examples like buying telecom in Korea, Japanese trading companies, and low-carbon utilities like hydroelectric or nuclear power.
Iben also believes investors are undervaluing latent cash flow in companies that own valuable assets, but aren’t making money currently. He mentions gold in international markets like Canada and Australia, as well as uranium as opportunity areas.
Baucom says the rising middle classes in Asia and Latin America are contributing to growth for investors in emerging markets.
“We’re not saying allocate massive amounts, but I would say that most investors have very little capital invested in emerging markets,” he says. Baucom notes some economies offering room for growth include China, South Korea, and Vietnam.
Knowledge is Power
Baucom says it’s “astounding” that investors give money to managers who haven’t conducted due diligence, may not have a track record, and allow them to buy yet-to-be-determined companies.
“When we are investing in a private-equity fund for a client, we’re doing extensive due diligence on [the fund’s] track record, on the people, and calling CEOs, former investors and co-investors, and triangulating around that firm’s track record before we commit,” he says. “Some of the speculative fervor that’s out there, that’s too exciting for us.”
Nisker says it’s important the manager has an understanding, but also thinks clients should ask how much they’ve invested in the recommendations they make. “Because if they’re not prepared to invest in it, why should you?”
Most important for him is that investors need to understand what they’re getting into themselves. “Education is key to everything in life, right? So ask the right questions. Dig a little deeper. If you don’t understand something, don’t invest in it,” Nisker says.