| Welcome to the May issue of the Select Wealth Management Dashboard Newsletter. I have to start this month's newsletter by acknowledging my beloved Wellington Phoenix. What an incredible season they have had. Despite the result not going our way on Saturday night, they played a semi-final in front of a record crowd of 33,500 at Sky Stadium. Congratulations to all players, staff and managers on what has been a remarkable season. Against all odds, you silenced the nay-sayers and confirmed Wellington Phoenix as serious contenders for the title in the foreseeable future. Bring on 2025!!!
Back to the matter at hand, I want to spend some time talking about the "Magnificent 7" this month. If you aren't familiar with this phrase, here's a quick breakdown: The S&P500 is an index of the 500 biggest companies in America. It is broadly accepted as the best proxy for the American share market (and by extension the broader American economy). The Magnificent 7 refers to the 7 biggest companies in this index - Alphabet (previously Google), Amazon, Apple, Meta (previously Facebook), Microsoft, Nvidia and Tesla. These 7 companies are so big, that they now make up 30% of the S&P500. So only 7 companies make up 30% of the total index, and the other 493 companies make up the balance of 70% of the index. These 7 companies are so big, that collectively they make more annual profit than all of the companies listed on the Australian stock exchange combined. And all of the United Kingdom's companies combined, and all of Germany's companies combined, and all of Russia's companies combined. It's actually mind-boggling. They are enormous! Aside from being an interesting fact, you may be asking what the relevance of this is. Well, when you have a small number of companies like this making up such a big portion of an index, it can skew the performance of the total index. If these 7 companies do well, the whole index does well. Similarly, when they do badly, it skews the index to the downside. And these 7 companies have been doing pretty darn well - mainly a function of the hype around AI (Artificial Intelligence) and their involvement in it. The table below shows what the return of each company was for the calendar year 2023:
As a group, they generated a return of 75.7% in 2023 - pretty impressive. The S&P500 on the other hand had a return of 24.3% - still really good, but well behind the Magnificent 7. Where this gets interesting is when you strip the Magnificent 7 out of the S&P500. Note how much the returns change then:
So as you can see, the S&P500 (excluding the Magnificent 7) had an average year (8% return) - it was purely those 7 companies that made it look better than average. So if you invested in a fund that had exposure to these 7 companies, your returns will have been good. If you invested in a fund that didn't, your returns will have been relatively poor. The question of course is "are these incredible returns from the magnificent 7 going to continue?". If you know me at all well, you would know that my answer is of course "nobody knows". But it is fair to say that excessive returns like those of the Magnificent 7 in 2023 can create excesses (or bubbles). We all know what happened to the value of our properties in 2022 after an over-exuberant 2021. I'm not for a moment calling for a correction in the share price of the Magnificent 7. These are incredible companies making incredible profits, so perhaps their extraordinary growth continues for many years. But I am cautioning that there is a very high concentration risk in the S&P500 right now, and it's important to understand exactly what you are investing in. If these companies were to experience a correction in their share price, a fund with high exposure (for example passive funds or an S&P500 ETF) would be acutely affected. Conversely, if they continue to deliver exceptional returns, these investments will prosper. The point is that these types of investments are not as diversified as they were a few years ago. As it happens, 2024 has seen some divergence in returns of the Magnificent 7 so far:
I consider this divergence to be healthy - it means that companies are being judged (priced) on fundamentals again, rather than just being priced up because of their exposure to AI. It's a theme I'm watching with interest - something I believe will have a material bearing on outcomes for the rest of this year. In the meantime, at Makowem & Isaacs Financial Planning we continue to follow a disciplined strategic investment approach with exposure to both passive and active investment funds. Our primary focus is not to try "beat the market" or bet one way or another on the Magnificent 7, but rather to ensure that we achieve your long term goals. That's all we care about. In terms of the markets, the past 30 days have been good for share markets. Most markets are up between 4% to 6%, with the outliers being the New Zealand Stock Exchange (down 0.58%) and the Hong Kong Hang Seng (up 19.43%). Mortgage and term deposits rates continue to edge down a bit in expectation of rate cuts by the Reserve Bank before the end of the year. After a slight tick up in house prices last month, this month has seen a decline of 0.25% again. Here are the numbers for the past 30 days: |
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At this stage, there is nothing material to report regarding your Select Wealth Management portfolio. We have included a new fund on the menu of investments (the Daintree Core Income Trust), and also have 1 fund manager on negative outlook which we are monitoring weekly. We also meet with our researchers JMI Wealth later this month for a quarterly update. As always, if there is anything you need to be aware of, we will make contact with you directly. Finally, a quick update on our Giving Back program for Ellie's Rescue and Rehome. I am pleased to confirm that we have raised $1,700 so far. With just over a month to go, we are still hopeful to reach our target of $2,500. As always, thank you so much for the introduction to your family and friends to allow us to continue this initiative - we really appreciate it. To keep track of the Giving Back program visit https://mifinancialplanning.co.nz/giving-back.html That's all for now. Chat again soon Warm regards Dave and the team at Makowem & Isaacs Financial Planning dave@mifinancialplanning.co.nz |
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This newsletter is intended for general distribution and does not constitute personal financial advice.