The Great Unloved of 2020 (Investments, that is)

Listening to the financial news, you may conclude that the stock market is rebounding nicely from the March lows, even considering September’s predictable volatility. When you look at your personal September 30 investment report, however, will you still feel so pleased?

We know that large technology companies are driving the overall markets, and that the five largest companies are contributing the lion’s share of the gains.  If you hold a Large Cap Growth fund, you are likely very pleased with its year-to-date results.

Almost all other holdings are lagging, and they offset the technology sector’s strong 2020 returns. The ones that stand out, in just a few categories and with results through Friday, September 25th, are:

By size –

Small cap companies – These are U.S. publicly traded companies that are small on a relative basis.  The representative Russell 2000 is down -10.7% YTD. Small cap value companies have been particularly hard hit.

By geography –

Developed non-US – These are companies represented by the MSCI EAFE Index (Europe, Australia and the Far East), which is down -8.15% YTD.

By sector –

Energy and Financials – Energy and Financial companies have done far worse than other companies based on the S&P 500 sector analysis.   Energy is down -47.7% YTD and Financials are down -22.1% YTD.

Every year will have its winners and losers, but this year there are far more on the losing side. The above are just some that, as a group, are below their values at the start of 2020.  Now we understand better why our diversified portfolio is not performing as we would hope.

Should we just continue to ride it out?  Should we change our allocation to exit these hard-hit positions?  There are reasons why staying invested in these areas makes sense, despite recent returns.

While small public companies are lagging in 2020, the Callan Periodic Table of Investment Returns 2000-2019 reports that small companies outperformed large companies in 12 of the past 20 years.  Internationally, 65% of the world’s capital markets are outside of the U.S. and, as such, are diversifiers from single country risk.  And we all know that the economic downturn from the pandemic has had a negative impact on both energy and financials, in addition to the implications of low interest rates. Do we really believe that this impact will persist well into the future?

If we have a long-term investment strategy that considers diversification a basic principle, then a wholesale change in our allocated investments due to recent results takes us off course.  What may be considered, however, are the opportunities to rebalance our positions, possibly trim as we look to the future, and review the comparative performance of the underlying holdings.

Keep in mind, even the most unloved investments may redeem themselves as we move to 2021!

For disclosures, please click here.