If you have been wondering why your offshore equity fund is underperforming the S&P500 index, then consider the following explanation: the S&P500 index represents the 500 largest companies in the USA at any given moment. Currently, three companies are battling it out for the honor of being the largest, with the order changing almost daily depending on their share price. Those companies are Microsoft, Apple and Nvidia. If we add the next two in line, being Amazon and Alphabet (Google), we have five companies that make up almost 30% of the entire index – and therein lies the problem. If the fund you are invested in does not have a very large weighting towards these five stocks, your returns would not have been even close to the performance of the S&P500 index.
But, before you become too upset, please consider the accompanying performance spreadsheet of what we call the “equally weighted S&P index” relative to the usual market cap index.
The equally weighted index is the performance you would see if all the companies were the same size and their share price performance carried the same weight as the bigger companies. It is clear that over the last ten years the bigger companies performed better that the average company in the index and if you were not invested in them, you would have underperformed.
If we analyze this situation we come to the following conclusions:
- If you concentrate your investment into just a handful of stocks, you increase your risk a lot. It is always easy to identify the winners with hindsight.
- There were long periods of time where the smaller companies in the S&P500 did outperform the bigger companies (1974-1979 and 2009-2014).
- The winners over the last two years like Nvidia, Apple and Meta have been very volatile and never cheap. So you never knew when it was a good time to buy them.
- Almost all the offshore equity funds you can invest in are global funds and do not invest just in the USA. The USA has been the best performing market for quite a number of years.
When we invest, we have to consider more than just the maximum return we can generate. We have to consider whether you are at a time in your life when you have to create wealth or preserve the wealth you have created. We have to decide between investment in something with the potential to permanently destroy your capital; or something where any significant loss of capital would be just temporary and the investment would bounce back owing to its quality. We have to consider the fact that the current good performance of an investment might be temporary and not sustainable. At the end of the day it is important for us to know that the funds we invest in will produce consistent longer-term inflation-beating returns; rather than investing in those shooting-star phenomena which burn brightly but fade away rather quickly.