As the bull market in US stocks hits new highs, some investors are searching for ways to pare their exposure to the small group of technology and communications stocks that fuelled market gains for years.
The market’s most crowded individual stocks are Microsoft, Amazon, Facebook, Visa, and Mastercard, according research firm Bernstein.
Just four stocks — Apple, Microsoft, Facebook, and Amazon — generated more than 20% of the S&P 500’s total return last year, according to data from S&P Dow Jones Indices.
Fund managers in a Bank of America Merrill Lynch report in December tagged technology stocks as the market’s “most crowded” trade.
While few see a clear reason for their run to end, some money managers worry the market’s leaders have become richly valued and overstretched, leaving them vulnerable to a sudden reversal in risk appetite.
“I think most investors… are going to be very surprised by how much risk is in their portfolios when you do get an environmental shift,” said Damien Bisserier, partner at Advanced Research Investment Solutions, a Los-Angeles based management and consulting firm.
The firm has sought to reduce its exposure to potential market volatility by investing in strategies it believes will be less-correlated with stocks, such as funds providing income through healthcare royalties or private real estate investments.
The dilemma is one that’s confronted investors at various times during the last several years.
Many have found that limiting exposure to stocks tends to hurt their portfolio’s performance in the long run. Doing so now, as worries over global growth, trade and a no-deal Brexit appear to be easing, may be especially difficult.
At the same time, most analysts believe the S&P is unlikely to approach last year’s 29% gain as receding global growth fears push some central banks to roll back their easing policies.
A Reuters poll of 52 strategists in late November showed a median forecast of 3,260 for the S&P 500 by the end of 2020. The index traded at 3,278 in the latest session.
Others are concerned that stretched valuations and an accumulation of funds in a limited number of bets could stoke violent market swings if investors try to sell all at once.