The Importance of Valuations in High Concentration Markets

Given concentration risk, understanding what a strategy and portfolio owns is more important than ever in current markets. Todd Rosenbluth, head of research, VettaFi, hosted a discussion with Columbia Threadneedle’s Jay McAndrew and Capital Group’s Jacob Gerber. The trio discussed valuations in the current market and the difference that active selection makes during Vettafi’s Equity Symposium.

“You have to beware of bifurcation,” cautioned Jay McAndrew, head of strategic beta sales, Columbia Threadneedle. McAndrew likens current markets to a Tale of Two Cities, given equity concentration.

Concentration is top of mind for advisors, and it’s a time when valuations really matter. McAndrew explained that from mid-August, the p/e ratio of the S&P 500 was around 19. Meanwhile, the top mega-cap companies currently trade with a p/e of around 27. Removing those from the index, McAndrew explained that the S&P 492 trades around 16 p/e.

“We’ve had lots of conversations with advisors that’s really about ‘help me rebalance back to a more normalized p/e to better protect what I’ve earned,’” said McAndrew.

Jacob Gerber, equity and multi-asset investment director, Capital Group, took it one step further. Gerber explained that an equal-weight S&P 500 strategy is around 15 p/e. Just three sectors currently trade with valuations about the S&P 500 itself.

The Importance of Valuations in High Concentration Markets