Bristol Gate’s US Strategy invests in companies listed on the S&P 500; however, the composition of our portfolio starkly differs from most passive and active growth US equity strategies. The main reason – the high concentration of FAANG+ stocks in the S&P500.
The S&P 500 is a market capitalization weighted index. In other words, the highest valued companies receive the highest weighting in the index. Currently, the five most valuable companies in the S&P 500 – Facebook, Apple, Amazon, Microsoft, and Alphabet (Google) – account for over 20% of the index. Even more staggering, when including Netflix this figure climbs to over 25% of the entire value of the index. As seen below, this is the highest market leader concentration in the S&P500 in the last three decades by a substantial margin.
Most visibly, high concentrations in the index have preceded periods of market weakness. Perhaps more concerning – and in contrast to the high concentration in 2000 – is that the current market leaders operate in more similar industries and market segments.
In symphony with market leader concentration reaching historic levels, we are seeing the largest spreads in valuation between growth, stability, and defensive stocks vs. cyclicals in the S&P500 in market history, even larger than the 2000 tech bubble.
In a portfolio risk management context, these two factors make passive investing far riskier than it may appear on the surface and not nearly as diversified as one would expect. A passive investment in the market-capitalization weighted S&P500 now would result in heavy exposure to FAANGs, growth, cyclical, and defensive holdings.
Bristol Gate’s strategy complements a wide array of passive and active US equity strategies as we do not hold any of the FAANGs and are diversified across multiple sectors and styles. Combining Bristol Gate’s strategy with passive ETFs can aim to improve portfolio risk profiles by adding equally weighted exposure to healthy dividend growing businesses that make up a small percentage of the S&P500 relative to the high-flying FAANGs.
There is a risk of loss inherent in any investment; past performance is not indicative of future results. Prospective and existing investors in Bristol Gate’s pooled funds or ETF funds should refer to the fund’s offering documents which outline the risk factors associated with a decision to invest. Separately managed account clients should refer to disclosure documents provided which outline risks of investing. Pursuant to SEC regulations, a description of risks associated with Bristol Gate’s strategies is also contained in Bristol Gate’s Form ADV Part 2A located at www.bristolgate.com/regulatory-documents.
This piece is presented for illustrative and discussion purposes only. It should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities and it does not consider unique objectives, constraints, or financial needs of the individual. Under no circumstances does this piece suggest that you should time the market in any way or make investment decisions based on the content. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. References to specific securities are presented to illustrate the application of our investment philosophy only, do not represent all of the securities purchased, sold or recommended for the portfolio, it should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by Bristol Gate Capital Partners Inc. A full list of security holdings is available upon request. For more information contact Bristol Gate Capital Partners Inc. directly. The information contained in this piece is the opinion of Bristol Gate Capital Partners Inc. and/or its employees as of the date of the piece and is subject to change without notice. Every effort has been made to ensure accuracy in this piece at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and Bristol Gate Capital Partners Inc. accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. We strongly recommend you consult with a financial advisor prior to making any investment decisions. Please refer to the Legal section of Bristol Gate’s website for additional information at bristolgate.com.
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