The Secret Sauce to a Core Portfolio

The “secret sauce” to any investor’s core portfolio is a blend of balance and diversity. Diversity means that you don’t have all your investment eggs in one basket (like going all-in on listed property, for example), but that you have exposure to a variety of different asset classes and industry sectors. Balance means making sure that the variety is appropriately weighted.

Investment advisors have all sorts of analogies for this, but one that works well is a box of Smarties (or a packet of Skittles, if you prefer). A diversified box of Smarties has all the colours; a balanced box means you don’t have 10 red ones and just one blue.

An even better way of looking at it is in the real world, with real investment portfolios. Here the Λnßro TITANS AMC is a good example.

Λnßro TITANS, which is available on Mesh.trade, is benchmarked against the S&P 500 – a stock market index that tracks the performance of 500 leading companies listed on exchanges in the United States.

Delivering Diversity

“The main difference between TITANS and the S&P 500 is that the S&P 500 is market-cap weighted,” explains Craig Antonie, CIO at Λnßro Capital Investments. “The bigger your market cap, the more you’re weighting in that index. As companies do better, their share prices increase and their weighting in the index gets bigger and bigger. What you’ve seen over the past 10 to 15 years is that a group of stocks, which people now refer to as the Magnificent 7, have done especially well. Over time, those seven stocks have grown so much in size and value that they now dominate the weighting of the S&P 500. The result is that if you invest in a S&P 500 index fund, about 35% of your money is really invested in just the top 10 stocks in the index… and seven of those are the Magnificent 7.”

Those Magnificent 7, incidentally, are all NASDAQ-listed tech stocks: Apple, Microsoft, Alphabet (Google), Amazon, Tesla, Meta and Nvidia.

Bringing Balance

Λnßro has applied the concept of equal dispersion to the ΛnßroTITANS portfolio, Antonie continues, by picking five or six of the top-performing stocks per industry, from across the different industry sectors represented in the S&P 500.

“We don’t want to have 35% of our money invested in just 10 stocks in one sector, because when markets go up or down, depending on what’s happening in the world, the impact of the movement of those particular stocks has an oversized impact on the overall portfolio,” he says.

To further mitigate the concentration risk, Λnßro has structured the TITANS portfolio according to the 11 industry sectors covered by S&P 500 companies. These 11 Global Industry Classification Standard (GICS) sectors are: Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate, and Utilities. In the TITANS portfolio, each sector is equally weighted to reduce concentration risk and to provide balance.

Allocating equal weighting across all stocks across all 11 sectors gives each stock a “one-man-one-vote” weighting, Antonie says. “This makes an important difference,” he says. “To give just one example, let’s take a relatively small company called Vistra Energy. Over the past three years, it has delivered a 405% return in the Utility sector. Now compare that to one of the Magnificent 7 stocks, Meta, which has delivered a 236% return over the same period. Vistra is rated in the bottom half of the S&P 500 in terms of its market cap, and you’ve probably never heard of it. But over that three-year period it delivered nearly double Meta’s returns.”

“The GICS sectors make up the overall US economy,” says Antonie. “But what happens in the S&P 500 is because a few of those stocks have become so large, you get an excessively larger weight allocation to a limited part of that economy.”

Mitigating Risk

With excessive weight allocation to any one stock comes excessive risk. To use simple maths, if 10% of your portfolio is in one stock and that stock drops by 50%, it means the overall value of your portfolio will come down by 5%. “In real terms,” says Antonie, “that is the weighting of something like Apple in the S&P 500.”

The risk of that happening may be slim, but it’s not impossible – and recent market events have shown what it looks like when it does happen.

“In 2022, interest rates shot up at the same time as the Russia-Ukraine war broke out, and the markets came down in a heap,” says Antonie. “The S&P 500 was down about 19% that year, and the Magnificent 7 fell about 46%. If you’d had a concentrated portfolio of tech stocks, your portfolio would have almost halved in 2022. But while the S&P 500 was down 19%, the AnBro TITANS portfolio – which was better balanced and more diversified – was only down by 9%.”

AnBro’s formulation was guided by two financial markets statistics: the Sharpe Ratio and the Sortino Ratio. “In very simple terms, the Sharpe Ratio looks at the amount of risk you take for your upside; while the Sortino Ratio looks at it from the opposite perspective, measuring your return relative to your downside risk. Λnßro TITANS shows a better Sharpe Ratio and a better Sortino Ratio than the S&P 500. That means that when the market is running, we’re taking less risk for our upside; and if the market’s falling, we’re falling by less. That’s the dream scenario for any investor: where you can do better than the S&P 500, but with less risk in either direction.”

Lower risk and higher returns are indeed the dream combination when it comes to investing in the capital markets. But to achieve that, you need another combination: diversity, along with balance.

• To invest in Λnβro’s TITANS fund, register for Mesh.trade and view the asset overview.
• The information provided in this article is for information purposes only, and is not financial advice.