Concentration Risk: Is It Time to Diversify?
Wednesday, April 29, 2020
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, has extensive experience in quantitative modeling and screening in the equity markets, in addition to in-depth analytical skills. Jack joined the portfolio team in 2004. He grew up in Boston and earned his BS degree in Finance from Suffolk University and his MBA from Babson College. He began his career in investments over 30 years ago and has managed money since 1987. He brings a high level of expertise in both fundamental and quantitative research skills as well as experience managing large pools of institutional assets. Previously, Jack was a portfolio manager at Value Line Asset Management, M&T Capital Advisors Group (Division of M&T Bank), and Dewey Square Investors (Division of UAM). Jack focuses on the materials, consumer staples, consumer discretionary, industrial and healthcare sectors. Jack has been interviewed by The Wall Street Journal, Barron‘s and Forbes Online. Jack has appeared as a guest on thestreet.com and After the Bell on Fox Business.
Full Bio (PDF)