A closer look at America's domination of the global stock market

Tue, 18 Apr 2017 09:45:26 PDT

by Scott Ronalds

America dominates the global stock market. More so than ever before. U.S. companies make up 60% of the MSCI World Index, which is a widely-used measure of the global market.

To put this in perspective, the second largest constituent, Japan, makes up less than 9% of the index. Canadian companies constitute roughly 3.5%.

America’s supremacy in global markets has grown steadily over the past decade, thanks in part to the strong performance of its technology companies. For reference, U.S. companies comprised just under 50% of the index in 2010 (and under 40% in the early 1990s).

A recent article in The Economist (America’s disproportionate weight in global stockmarket indices) provides some colour on America’s dominance, and why it may not be such a good thing. As the piece suggests, “Anyone using the index to monitor the market is seeing a picture heavily distorted by Wall Street.”

The United States is a massive economic powerhouse, so why should investors be concerned about its dominant and growing weight in the global index? Two key reasons. First, you never want to put too many eggs in one basket. Investors who want broad-based exposure to global markets are in reality getting a U.S.-heavy portfolio by investing in the index or a fund that closely resembles it. And second, American companies aren’t cheap. On many measures, U.S. stocks are among the most expensive in the world. This means their upside potential is likely more limited, and more importantly, their downside risk is greater.

This isn’t meant to infer that U.S. stocks will fall of a cliff tomorrow, but rather that stocks in other parts of the world offer more attractive opportunities going forward. The Economist article notes that stock valuations in Europe, Asia and the emerging markets are considerably lower than their U.S. counterparts. Our research points to the same conclusion.

America is home to many world-class companies. We own several of them in our Equity Fund and Global Equity Fund. And we always will own U.S. stocks. That’s what good diversification is all about. But we’re more measured in our exposure than the index and many other firms, particularly in our Global Fund, for the reasons mentioned above. (Currently, U.S. stocks make up about 15% of our Global Fund. Our focus instead is on better valued European and Asian companies.)

We’ve never been inclined to build portfolios that resemble an index. Far from it. The current disproportionate composition of the global index helps emphasize why.

10 years: A performance analysis

Tue, 11 Apr 2017 10:15:54 PDT

by Scott Ronalds

Our funds officially reached the decade mark this quarter, which means we have our first set of 10-year performance numbers. We’re excited to share the results with you.

Our goal when we started Steadyhand was to build and manage funds that provide market-beating returns over the long run based on our undexing approach.

Three of our four original, long-term funds have beat their respective benchmarks over the past decade. We’ve excluded our highly-ranked Savings Fund from the analysis, as it’s a short-term, savings-focused fund. As well, our Founders Fund wasn’t launched until 2012 and thus doesn’t have a 10-year record.

A few things to note: (1) All our returns are after-fee, while the benchmark numbers have no fees included. (2) Clients who invest over $100,000 with us enjoy higher returns thanks to our fee reduction program. Furthermore, our first clients will also start receiving an additional 14% break on their fees as part of our 10-year loyalty discount. (3) Benchmark returns are rebalanced to the target allocation on a quarterly basis.

You’ll note that our Global Fund has lagged. We’re the first to acknowledge this, and have communicated frequently as to why the fund has underperformed, and why we think it’s poised for a turnaround.

So how have longstanding Steadyhand investors fared in general? Our balanced clients whose portfolios resemble our 'model portfolios' have achieved long-term returns ahead of their respective benchmarks.

Another number we’re excited about is Steadyhand’s money-weighted return. This represents the average annual return our clients (in aggregate) have achieved. It takes into account the timing of purchases and redemptions. When compared to our time-weighted return (which doesn’t take into account flows in and out of our funds), it’s a good indicator of whether our clients are sticking to their plans through good times and bad. Our 5-year money-weighted return is 8.3%, while our time-weighted return over the same period is 8.4%. We’ve referenced 5-year numbers because our client base was insufficient in our early years to calculate meaningful 10-year numbers and our funds weren’t available to the public until April 2007.

The difference between the returns a fund achieves versus the returns its investors achieve has been coined the “behaviour gap.” It can be substantial for some firms because of investors reacting adversely to market news, chasing short-term returns, and generally trading too much. We’re thrilled that we don’t have a behaviour gap.

As a Steadyhand client, we thank you for your confidence in our business and your commitment to long-term investing. We hope we’ve met your expectations thus far.

And if you’re not a client, what are you waiting for? We’ll do our best to continue to provide index-beating returns – and a steady hand – over the next 10 years.

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

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