Concentration Risk: Is It Time to Diversify?

Wednesday, April 29, 2020

Concentration Risk: Is It Time to Diversify?

Earlier this year, Reuters reported that, for the first time since 1982, the calendar year 2019 ended with two stocks accounting for more than 10% of the weight in the S&P 500 Index. Microsoft (MSFT) and Apple (AAPL) comprised 10.02% of the index.

Even with the recent market turbulence, that share has grown. Microsoft and Apple comprised 10.6% of the S&P 500 as of April 22, 2020!

Together, these two stocks are valued higher than all but five of the eleven economic sectors that comprise the S&P 500 on price to trailing earnings. What’s more, the combination of these two stocks represents a higher market capitalization than all but two non-U.S. countries in the MSCI All-Country World Index, an index that includes countries such as France, Saudi Arabia, and the UK. The two stocks dwarf all countries in that index except Japan and China.

To put this another way, if you were rich enough, you could either buy all of Microsoft and Apple—or you could buy all of the Real Estate, Utility, and Materials stocks in the S&P 500…and still have money left over. Oh, and in this Real Estate, Utility, and Materials portfolio, you’d generate nearly 3x the income: 3.39% dividend yield vs. 1.15% for the combination of Microsoft and Apple portfolio.* If you wanted even more income, you could swap out the Materials stocks for Energy stocks to generate a 4.48% dividend yield.

 

As of April 22, 2020
Source: Bloomberg, S&P, and Miller/Howard Research and Analysis

In a market capitalization-weighted world, Miller/Howard believes it may be time to rebalance your portfolio to reduce concentration risk, and dividend-paying stocks could provide a solution.

* Data as of April 22, 2020
Microsoft and Apple were not held in any Miller/Howard strategies as of April 22, 2020.

John E Leslie III, CFA
John E Leslie III, CFA
Portfolio Manager

John (Jack) E. Leslie III, CFA, focuses on diversified, dividend-paying stocks. He is a member of Miller/Howard's Board of Directors. Prior to joining Miller/Howard in 2004, Jack was a portfolio manager at Value Line Asset Management, M&T Capital Advisors Group (a division of M&T Bank Corp.), and Dewey Square Investors Corp. (now part of Old Mutual Asset Management). Jack earned his BS in Finance from Suffolk University and an MBA from Babson College.

DISCLOSURE

INVESTMENT PRODUCTS: ARE NOT FDIC INSURED - MAY LOSE VALUE - ARE NOT BANK GUARANTEED

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. To receive a list of all recommendations for the previous year, please email compliance@mhinvest.com. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction.

The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be appropriate for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such appropriateness. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance.

Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

The returns on a portfolio that utilizes environmental, social, or governance (ESG) criteria for stock selection may be lower or higher than portfolios where ESG factors are not considered, and the investment opportunities available to such portfolios may differ.

Past performance does not guarantee future results.

© 2024 Miller/Howard Investments.

DISCLOSURE

INVESTMENT PRODUCTS: ARE NOT FDIC INSURED - MAY LOSE VALUE - ARE NOT BANK GUARANTEED

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. To receive a list of all recommendations for the previous year, please email compliance@mhinvest.com. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction.

The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be appropriate for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such appropriateness. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance.

Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

The returns on a portfolio that utilizes environmental, social, or governance (ESG) criteria for stock selection may be lower or higher than portfolios where ESG factors are not considered, and the investment opportunities available to such portfolios may differ.

Past performance does not guarantee future results.

© 2024 Miller/Howard Investments.

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