Merryn Somerset Webb: investing doesn’t have to be all about America

Look at what interactive investor’s customers are buying for their ISAs this year and you will see a clear theme, says ii’s collectives editor Kyle Caldwell. It’s mostly about global funds with a heavy bias to the US. Think an awful lot of global trackers, the Fundsmith Equity fund, Alliance Trust Ord (LSE:ATST) and L&G Global Technology trust.

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If you think the past is any guide at all to future performance, this makes obvious sense. The L&G Trust has all the big US names (Microsoft Corp (NASDAQ:MSFT), Apple Inc (NASDAQ:AAPL), NVIDIA Corp (NASDAQ:NVDA), Meta Platforms Inc Class A (NASDAQ:META) and Alphabet Inc Class A (NASDAQ:GOOGL)) in its top 10. Fundsmith has a strong bias to the US (around 70% of the portfolio) and significant exposure to the big tech firms (Microsoft and Meta are in its top 10). Alliance Trust has not, says Kyle, “been shy” of investing in America’s top tech names either (Alphabet is the trust’s top holding). And it is here - in the US and in particular in the big US tech names - where most of the money has been made in markets over the last few years. 

The S&P 500 produced a return of 11% in the last quarter of 2023 and has given investors who have stuck with it another 10%, to say nothing of 22 record highs in the last three months alone. Nvidia is now worth around $1 trillion more than at the turn of the year. Apple is bigger in terms of market capitalisation than the German Dax index as whole and worth more than the GDP of all but six countries in the world.

At the same time, the concentration of the US - and by extension the global - stock market is as high as it has ever been. In the US, the 10 largest companies make up close to 35% of the market - against a long-term average of more like 20%. Look at the top 50 stocks in the world (mostly American) and you will see they are also rather more expensive than usual. On an average price/earnings (PE) ratio of close to 30 times, they are closing in on levels last seen in 1999 (not a good thing by the way). 

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Can this mega-cap exceptionalism continue? Is it a bubble? ii head of markets Richard Hunter reckons a pullback is very possible - “occasionally we do need to let some air out of the tyres” - but also notes that it’s hard to call the rise in the Nvidia share price in particular a bubble. Instead, its valuation looks to be firmly backed up by its extraordinary growth path.

That said, this is a good time for all investors to examine their portfolio and see exactly what they really own. Hold a US fund or global fund (tracker or not) and you will definitely have a lot of exposure to these few companies. Most global funds will be a good two-thirds in the US and much of that will be in the big tech firms, companies that might, just might, be worth their current valuation, but might not be worth much more (nothing goes up forever). As a recent note from Hussman Funds notes: “even on the basis of optimistic year-ahead earnings estimates, the ratio of the S&P 500 to forward operating earnings is at levels, based on data since the 1980s, associated with average subsequent 10-year S&P 500 total returns close to zero”. 

One simple way to try to part deal with this, says Kyle, is to pick an equal-weighted exchange-traded fund (ETF) instead of a market cap weighted one in the US (such as the S&P Equal Weight ETF) - so that instead of holding more of each stock as its price rises (effectively being a momentum investor) you hold the same amount of each company in the index all the time. Do this and you will benefit from rises in the mega-caps, should there be more, but not be hostage to their fortunes. You might also look at some of the US funds that have limited exposure to the big US tech companies such as the Premier Miton US Opportunities fund.

Investing also doesn’t have to be all about America. There is also plenty to get excited about elsewhere. On the boring, but really not bad at all front, there are money market funds such as the Royal London Short Term Money Market fund - still popular, says ii’s deputy collectives editor Sam Benstead, for the simple reason that getting 4% or 5% on your money with almost no risk seems like a great deal to most people after years of low interest rates. They have looked like a solid alternative to the wealth preservation trusts such as Ruffer Investment Company Ord (LSE:RICA) and Personal Assets Ord (LSE:PNL) that the risk averse used to use to hedge the zero-rate environment.

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Also of interest might be some of the UK’s high-yielding shares, says Richard. Lloyds Banking Group (LSE:LLOY) offering 5.6%, HSBC Holdings (LSE:HSBA) on 8% and Legal & General Group (LSE:LGEN) also on around 8% are all popular with ii investors. Otherwise, you might look at the UK listed private equity trusts, says Sam. If you want “direct access to amazing software companies that have proven they can keep going in any environment” try HgCapital Trust Ord (LSE:HGT). The shares traded at a discount to their net asset value (NAV) of 25% last year, but you can still get them on an 8% discount today, which isn’t bad either, given that when the trust sells its investments it tends to do so at prices considerably higher than their stated NAV. 

Outside the UK there is a group of excellent companies in Europe, now known as the GRANOLAS (GSK (LSE:GSK), Roche Holding AG (SIX:ROG), ASML Holding NV (EURONEXT:ASML), Nestle SA (SIX:NESN), Novartis AG Registered Shares (SIX:NOVN), Novo Nordisk A/S ADR (XETRA:NOVA), L'Oreal SA (EURONEXT:OR), Lvmh Moet Hennessy Louis Vuitton SE (EURONEXT:MC), AstraZeneca (LSE:AZN), SAP SE (XETRA:SAP), Sanofi SA (EURONEXT:SAN)). These are just as high quality as the US mega-caps but less volatile and a little cheaper (if not that cheap in absolute terms).

Further afield, the Indian stock market has been an astonishing performer - up over 170% since early 2020 - but is, says Kyle, probably still a good hold for the long term. Popular ways in for ii investors are via the Jupiter India fund and the India Capital Growth Ord (LSE:IGC) investment trust. For those looking for a broader emerging markets exposure, the Pacific Assets Ord (LSE:PAC) trust is always interesting (and, bar a few non-politically exposed companies, favours investing in India over China).

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Finally, a word of warning. If the mega-caps do topple, the less expensive bits of the market are bound to follow them down - just (hopefully) not as far and not for so long. Either way, with market concentration as high as it is, valuations high, interest rates and inflation uncertain and geopolitics all over the place, there’s plenty of risk out there.

ISA investors might want to be sure this year’s portfolios are ready for it. One way to do that, beyond the diversification mentioned above, is to hold a little gold - either via the iShares Physical Gold ETC (LSE:IGLN), or, if you fancy a little exposure to other metals along the way, via the BlackRock World Mining Trust Ord (LSE:BRWM). The metal has hit a few all-time highs recently. Keep an eye on it, says Sam. “It could be the undercover star of the next 10 years.” 

Merryn Somerset Webb is a senior columnist for Bloomberg. Previously, she was editor-in-chief of MoneyWeek and a contributing editor at the Financial Times. She is also a non-executive director of several UK-listed investment trusts.