Diversifying U.S. Equity Exposure in a Concentrated Market

Eric Dhall
Portfolio Manager, Macro Asset Allocation

Ryan Kimmel
Strategist, Macro Asset Allocation

DoubleLine Portfolio Manager Eric Dhall and Asset Allocation Strategist Ryan Kimmel propose valuation and equal-weight strategies offered by DoubleLine for investment in U.S. equities and to complement investors’ exposure to the S&P 500, the latter feature explored in light of the nearly 40% weighting of the widely followed benchmark’s market cap to the information technology sector and more than 40% to its 10 largest-cap companies. “Market concentration alone does not necessarily signal an impending correction,” the authors write, acknowledging many market-leading companies enjoy strong fundamentals. Investors, however, should consider complementary investment strategies to lessen their equity allocation’s bet “on the continued outperformance of a few select companies and one sector. The winners of the past are not always the winners of the future, particularly when the winners are trading at material valuation premiums.” Messrs. Dhall and Kimmel recommend investors consider two equity investment strategies, either apart or together, that depart from passive replication of market-capitalization-weighted indices such as the S&P 500. DoubleLine offers equity investment strategies that implement the Shiller Barclays CAPE® U.S. Sector Total Return Index (CAPE®). CAPE® systematically allocates to relatively inexpensive sectors with positive momentum, reallocating and/or rebalancing on a monthly basis. In contrast to the sector-level valuation approach of the CAPE®, DoubleLine also offers a strategy that implements the Barclays Fortune 500 Equal Weighted Total Return Index (Barclays Fortune 500). The Barclays Fortune 500 selects individual stocks at the company level, equally weighting companies in the Fortune 500 universe, a selection set based on revenue, not market capitalization. “Strategies based on CAPE®, the Barclays Fortune 500 or both are not replacements for cap-weighted exposure; they are strategic complements,” DoubleLine’s Dhall and Kimmel write. CAPE® diversifies valuation risk; Barclays Fortune 500 diversifies single-company concentration risk.”

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