Philipp Wörz | Fund Manager | PSG Asset Management | mail me |
What does it mean to be the best possible custodians of our clients’ capital? To us, it means equipping our clients to build wealth over the long term. This is a broad mandate, and it presents more challenges than first appear.
Markets are constantly changing. These changes extend beyond the daily gyrations that dominate headlines. At a deeper level, relationships between asset classes, leading market sectors, and levels of market concentration shift over long cycles. These slow-moving changes attract far less attention than daily market noise. Yet they shape returns for years at a time.
Combined with recency bias, our tendency to give recent events too much weight, they can create the dangerous perception that markets ‘just always behave this way’. Consequently, investors often position their portfolios for an environment that may no longer exist. This can have disastrous consequences for their financial wellbeing. Four examples illustrate this trap and highlight the importance of seizing tomorrow’s opportunities rather than relying on yesterday’s winners.
Believing US markets always dominate
The US market has dominated returns since the Global Financial Crisis (GFC) in 2008. However, investors often forget that the preceding decade belonged to the rest of the world. In early 2008, a rear-view mirror look at the previous decade revealed poor US returns and China’s rise.
Materials, energy and real estate led the market, while technology, still nursing dotcom wounds, and healthcare lagged. Meanwhile, the US dollar had fallen 40% since 2001, reaching an all-time low in March 2008. The popular advice at the time was simple: avoid the US and technology, and buy anything linked to China and commodities.
The following 18 years delivered almost the exact opposite. Since March 2008, US stocks have outperformed international markets by more than 6% a year. Technology and healthcare led the gains, while materials and energy languished. China, meanwhile, went from a must-own market to ‘uninvestable’.
Today, US and AI-focused companies dominate portfolios and passive indices. However, the ‘US exceptionalism narrative’ may be running out of steam. Calendar year 2025 offered the first indication that the US might not be invincible. The MSCI All Country ex-USA Index delivered 33.1%, compared with 17.8% for the MSCI US Index.
Believing extreme index concentration is new
Extreme index concentration has occurred before. In many cases, it ended badly for investors who simply tracked indices. At the peak of the tech bubble in March 2000, Vodafone was worth around $350 billion. It accounted for roughly 13% of the FTSE 100.
An equity fund benchmarked against that index would have faced immense pressure to maintain Vodafone’s index weighting. Its extraordinary share price performance made it difficult for fund managers to justify holding less than the benchmark weight. Twenty-five years later, Vodafone’s market value had fallen 89% from that peak.
The Nokia example is even starker. At its peak in June 2000, Nokia was worth approximately $270 billion. It accounted for more than 70% of Finland’s HEX 25 Index. Since then, it has lost more than 85% of its value.
Concentration is not new. Investors who replicate indices without question may take on far more risk than they realise. Recognising these historical patterns is essential to seizing tomorrow’s opportunities instead of blindly following today’s dominant stocks.
Believing the US dollar is always strong
Cycles profoundly influence which assets perform well. Emerging markets, real assets and value stocks tend to thrive when the dollar weakens. A softer greenback eases dollar-denominated debt burdens, boosts commodity demand and makes assets outside the US more attractive.
Crucially, these cycles can last for years. Investors who miss a turning point may find their portfolios calibrated for an environment that no longer exists. They can then pay the price for several years as market conditions evolve.
Believing bonds always protect you when shares fall
The cornerstone of the traditional 60/40 portfolio was the safe-haven characteristic of long-dated US government bonds.
During the GFC, these bonds returned about 20% while the S&P 500 lost more than 40%. They also displayed a strong negative correlation with equities during that period. However, 2022 delivered a very different outcome. The S&P 500 fell about 25%, while long bonds collapsed by more than 30%. This simultaneous decline devastated portfolios that relied on bonds for protection.
The warning sign lay in the starting price. At the end of 2007, the US long bond yielded 4.5%, comfortably above inflation. At the start of 2022, it yielded just 1.9%, well below inflation.
Furthermore, 125 years of data show that the negative bond-equity correlation of the past two decades was the exception. Long periods in which bonds and shares fall together may, in fact, represent the norm.
The cycles may be turning, and portfolios are not ready
Ironically, each of these major cycles may be approaching an inflection point, or it may already have reached one. Markets are priced for near perfection, with investors expecting earnings growth to continue well above trend.
Price-sensitive investors know that the price they pay at the outset remains one of the best predictors of the returns they will earn. Nevertheless, many portfolios remain positioned for an environment that may look very different from the one ahead. This mismatch could have significant consequences for long-term investment outcomes.
So, what are investors to do?
If the past provides a poor predictor of future success, investors must look beyond recent winners. History shows that top performers can reverse sharply from one decade to the next. Therefore, investors must ask how best to approach the current environment and where they are likely to find opportunities.
We believe price-sensitive, bottom-up stock pickers are well-positioned to help investors navigate a changing environment. They consider the bigger picture and identify mispriced, quality assets that they can buy at a margin of safety.
We also believe an approach centred on independent thought and in-depth research will prove crucial to investment success in the years ahead. By questioning prevailing assumptions, assessing valuations carefully and recognising long-term market cycles, investors can improve their prospects of seizing tomorrow’s opportunities. Ultimately, successful investing requires the discipline to look beyond today’s market leaders and prepare for the shifts that will shape tomorrow’s returns.
