Look at a chart of the performance of US equities relative to those of the rest of the world and you may instantly feel that something has to change.
Until 2009, global markets moved more or less in step. Then the US started to pull away. Over the past decade, US stocks have outperformed those of the rest of the world by 100%.
Look at fund performance tables in the US and you’ll see this very clearly. Of the top ten performers of the last decade, nine have been heavily focused on US equities and in particular US technology stocks. The only exception is a tech-heavy Japanese fund.
However, look back another decade and you might feel vindicated in thinking that change is on the way. Guess what eight of the ten worst performing funds were invested in? Yup, tech stocks – mainly US or Japanese. If you had sold all your commodity-heavy funds (the best performers until 2010) and switched into what were then the ten worst funds of the decade (invested in big tech) you would have outperformed by 260%. Nice.
There is, according to Simon Evan-Cook of Premier Asset Management, something of a “ten-year tell” here – and one that suggests investors who stick with US technology stocks today “are making the same costly mistake they made ten years ago” – assuming that an investment trend is a permanent state of affairs.
We are in the middle of an extraordinary technological revolution
Not everyone is convinced about this. Look, for example, to the world’s biggest equity investor, the Norwegian Oil Fund. It plans to reallocate up to $100bn from European equities (where you could argue there is value) to US equities (tougher).
According to George Cooper of Equitile, an investment manager, that’s the right choice. Industrial revolutions are not “mean reverting” (no one ever went back to horses for long-distance travel) and we are in the middle of one extraordinary industrial revolution.
A small number of extraordinary companies – which just happen to be disproportionately located in the US – “are transforming the global economy” via a digital revolution that is still in its infancy. That’s not changing any time soon.
It won’t go back to the way things were and it won’t move elsewhere – innovation clusters tend to be “both persistent and powerful”. The point for investors to remember is this: “When the processes driving markets are not mean reverting, the markets should not be mean reverting.” Thus, Equitile is sticking with growth stocks, and sticking with the US.
But while trends may change lives, they don’t always make money
I love an intelligent disagreement. But you may be wondering which way to jump. The key thing is that both of these points of view can be correct.
We do anchor to prices – and when they move we are often lousy at reappraising the fundamentals and changing our views. Plus, there are always companies that are impossible to call overvalued for the simple reason that we don’t yet know how much they can change our world.
But we must also bear in mind that while trends can change our lives completely, they won’t necessarily make us money. Those who bought tech funds in 1999 reasoned that their services would dominate our lives. Those who bought commodity funds in 2010 reasoned that China would keep growing and gobbling up resources. Both ideas were, as Mr Evan-Cook puts it, “spot on”. Yet both lost investors money.
Go back, if you will, to railways. They changed everything and lost a lot of people a lot of money. So, yes, US technology companies will very probably continue to dominate our lives for many years to come. But it’s also possible that the enthusiasm for them as an investing trend means that too many of tomorrow’s returns are reflected in today’s price. However, it is also possible that the same enthusiasm has left real value in its wake.
Compromise – hold some real tech stocks, but look for value elsewhere
So what do you do? It isn’t fashionable in the UK at the moment, but how about a little compromise?
You might do this by refusing to hold US companies that are ordinary companies masquerading as tech firms – the soon-to-be-listed WeWork being the classic example – and holding only those that are really doing something special (or the few funds capable of finding special).
Next, you might look at where there is value. Look at the worst-performing funds of the past decade and you will find a few energy funds in there. I mentioned here a few weeks ago that the oil price might soon be on the rise, in which case you might look at the investment trusts in the area – the BlackRock Energy and Resources Income Trust is down a satisfying 20% in the last five years and yields 5%.
Much riskier is Riverstone Energy. It is more focused and holds unlisted assets. Performance has also been horrible and the trust now trades at a 30% discount to its stated net asset value.
You might also look to non-tech Japan, maybe even real estate. Some of you will remember when the land on which Tokyo’s Imperial Palace sits was worth more than California. Waverton Asset Management has updated the comparison – today the assets of all 70 real estate companies listed in Japan are worth less than the combined market value of Uber and Lyft.
Finally, what of UK retailers? The dwindling market capitalisation of poor old Marks and Spencer means it has been booted out of the FTSE 100, but it actually makes a profit. In fact, it’s trading on a price/earnings ratio of under eight times, with a thumping dividend yield of 7% that is nearly twice covered. All this at a time when most people in finance spend all their time worrying about negative interest rates.
Even so, I haven’t bought the shares. I have to feel that lingering brand loyalty can be turned into actual sales, plus the jaw-droppingly awful store layout will have to improve before I can really contemplate it. But I have, as a small act of solidarity with and perhaps long-term affection for the company, bought a pair of M&S shoes (buckled square toe loafers, should you be interested).
If no one in the office giggles when I wear them, perhaps I’ll take another look at M&S shares for my Sipp.
• This article was first published in the Financial Times