As we consider the investment outlook for 2021, active investment strategies are in prime position to manage market concentration risks and capture opportunities.
In the recent webcast, Have Indexes Gained Too Much Weight? Get Active in 2021, Christopher Dillon, Investment Specialist, Multi-Asset, T. Rowe Price, highlighted the ongoing leadership in technology stocks, with the tech sector making up 33% of the MSCI ACWI Index, compared to 16% just 15 years ago. He attributed the current leg up in tech to the ongoing Covid-19 pandemic, which has accelerated the change in the way people interact with the world. For instance, year-over-year credit card spending on online retail has jumped 83%, and U.S. e-commerce penetration has accelerated to 26% in 2020, compared to just 6% in 2008. Yet Dillon warned that the massive reallocation of consumer spending could partially or even completely reverse in the second half of 2021 and 2022 as the economy returns to normal.
Can Tech Dominance Continue?
Meanwhile, traditional index investments have exhibited a higher concentration to growth and tech, with the combined weight of the 5 largest S&P 500 components now at 22.2% of the benchmark, compared to about 12% back in 1991.
“We will eventually get through this pandemic, and as we do, economic recovery will accelerate. Vaccine developments are key to moving to a ‘COVID off’ regime,” Dillon said.
The strategist argued in favor of an equity market overweight as investors continue to ride the nascent bull market recovery.
“Stocks have rallied from the bottom and may look expensive, but Treasuries look even more expensive. By historical standards, the equity risk premium is alive and well,” Dillon noted.
“Technology disruption accelerated in 2020 which has stretched valuations. Most recently, domestic market leadership has been driven by Value and Mid/Small Caps. Going forward, technology disruption themes remain intact while ‘cyclicality’ takes on elevated near-term importance,” he added.
Dillon highlighted aggressive stimulus measures, such as the ongoing near zero-rate environment and government aid package, both of which are supporting the ongoing bull run.
“It’s important to monitor the level, but also the rate of change in fiscal and monetary stimulus measures. Investors should be mindful of the impact of a deceleration,” Dillon said.
“Zero rates have incredibly important implications for financial markets, particularly on expected returns. The search for yield and the ‘search for returns’ will continue,” he concluded.
Innovation Trumps All
As a way for investors to find value in today’s market, Larry J. Puglia, Portfolio Manager, T. Rowe Price, pointed to the impact of innovation on incumbent companies. We are witnessing innovation in areas like the Internet, cloud computing, health care, media, energy, and automation.
“Innovation can disrupt an existing industry or create a new industry,” Puglia said.
Puglia also underscored the importance of growth stocks in the global market environment. He pointed out that fundamental metrics support superior performance by growth stocks during the current growth cycle. The difference in free cash flow growth is particularly notable.
To help investors better navigate these newly developing markets, Puglia highlighted the benefits of strategic investing.
“Disciplined thinking and process are important to providing durable, long-term solutions – and to recognize and avoid short-term fads or inappropriate business practices,” Puglia added.
4 Actively Managed Solutions
At T. Rowe Price, investors can look to four actively managed ETF strategies based on time-tested investment strategies, including the T. Rowe Price Blue Chip Growth ETF (TCHP), T. Rowe Price Dividend Growth ETF (TDVG), T. Rowe Price Equity Income ETF (TEQI), and T. Rowe Price Growth Stock ETF (TGRW).
The T. Rowe Price Blue Chip Growth ETF seeks to provide long-term capital growth by investing in common stocks of large and medium-sized blue-chip companies that have the potential for above-average earnings growth.
The T. Rowe Price Dividend Growth ETF seeks dividend income and long-term capital growth by investing the majority of its assets in the common stocks of dividend-paying companies expected to increase their dividends over time.
The T. Rowe Price Equity Income ETF seeks a high level of dividend income and long-term capital growth by investing most of its assets in common stocks, with an emphasis on large-capitalization stocks that have a strong track record of paying dividends, or that are believed to be undervalued.
Lastly, the T. Rowe Price Growth Stock ETF seeks long-term capital growth and invests in companies that have one or more of the following: superior growth in earnings and cash flow, ability to sustain earnings momentum even during economic slowdowns, occupation of a lucrative niche in the economy, and the ability to expand during times of slow economic growth.
Financial advisors who are interested in learning more about active strategies can watch the webcast here on demand.