Q1 2025 & March 2025 Update & Fund Commentaries

Hi all,

We’re back with your latest quarterly and monthly updates. In this edition, we’re sharing a look at what shaped the investment landscape in Q1 2025, plus a quick monthly wrap of what went on in March.

As always, these insights come from our partners at PortfolioMetrix, and we hope you find them useful and easy to digest.

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This piece was compiled by Brendan de Jongh, SA Head of Global Investment Strategy at PortfolioMetrix.

This message includes both the Quarterly Investment Update & Fund Commentary for Q1 2025, and the March 2025 Monthly Update. If you would like to jump ahead to each of these, please click the links below:

IS THE S&P 500 EQUAL WEIGHTED INDEX THE SOLUTION YOU THINK IT IS?

The S&P 500 is widely regarded as one of the best gauges of US Equities and the global stock market, representing almost 65% of the MSCI ACWI (All Country World Index). However, investors are becoming increasingly concerned about the extreme concentration risk that is present within the index due to the Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla).

Currently, the Magnificent 7 make up 32% of the index. This concentration means that when you invest in the S&P 500, a significant portion of your money is placed in just a handful of companies.

Recently, there has been a popular trend with investors turning to the S&P 500 Equal Weighted Index (EWI) as the solution to this concentration risk. The equal weighted index weights each stock at 0.2% regardless of its market capitalisation. At first glance it looks like an excellent way to reduce the concentration risk of the Magnificent 7, as no single company can dominate, resulting in the EWI often being seen as a cheap, passive diversifier in your portfolio.

In reality, the EWI is not a simple passive fund allocation, as it carries large active exposures resulting in your portfolio swapping one risk with several others.

THE REALITY OF THE S&P 500 EQUAL WEIGHTED INDEX

When you invest in the EWI, you significantly change your sector exposure. The Technology sector weight is reduced by 16% which is then reallocated to cyclical sectors such as Industrials (+7%), Utilities (+3.8%) and Materials (+3.2%). This is an active decision represented as a low conviction in growth sectors and a high conviction in cyclical sectors that typically show greater sensitivity to economic cycles and downturns.

The S&P 500 is predominantly a large cap index with only 18% of the index made up of mid-cap companies. In comparison, the S&P 500 Equal Weighted Index reduces your large cap exposure from 81% to 32%, meaning that mid and small cap stocks make up 68% of your investment. This shift exposes you to companies that are typically more volatile. Over the past 5 years the volatility of the S&P 500 was 16.9% compared to the 18.1% of the EWI, a material difference.

Small and mid-cap companies absolutely deserve a place in a well-diversified portfolio. However, the extent of your exposure should be a deliberate decision aligned with your risk tolerance and investment objectives, not an unintended outcome due to your index selection.

The EWI’s shift in market cap is brought about by implicitly saying you have more conviction in each of the 398 companies that you upweighted than the 99 companies that you downweighed to 0.2% resulting in an active bet on smaller companies. While smaller companies may offer growth potential, their higher volatility introduces specific risks that should be consciously incorporated into your investment strategy rather than adopted by default through an equal-weighted approach.

Finally, to maintain the weights of each company at 0.2%, the EWI requires frequent rebalancing which can drive up annual charges. When comparing Invesco’s S&P 500 and S&P 500 Equal Weighted ETFs the difference in annual charges are 0.12%.

DOES THE EQUAL WEIGHTED S&P 500 PROTECT YOU IN MARKET DOWNTURNS?

If the goal is to protect yourself against market downturns, the S&P 500 Equal Weighted Index has offered mixed results. During major market crises over the past 20 years, the EWI has experienced similar drawdowns in all major market events.

This happens because you have increased your exposure to mid and small cap companies which often have less financial resilience and liquidity in times of economic stress and given the increased exposure to these companies in the EWI, your portfolio would be more exposed. The increased cyclical sector weights of the EWI can further amplify sensitivity to economic cycles.

Although the S&P 500 Equal Weighted Index has outperformed the S&P 500 since inception, it has underperformed over most time periods since then.

SHOULD YOU INSTEAD TURN TO ACTIVE MANAGERS?

We looked at the performance of active Managers against the S&P 500 Equal Weighted Index over the past 20 years. What became apparent was that in periods of market stress and higher volatility, active managers, who have the ability to change their positions based on the current market conditions, often outperformed the EWI. This is because active managers can reduce their exposure in companies and sectors that are particularly vulnerable during downturns, unlike the EWI which is forced to hold each position at 0.2%.

The S&P 500 Equal Weighted Index is seen as a simple solution to the concentration risk in the market. However, as we have shown, it represents meaningful active bets on smaller companies and cyclical sectors. To diversify against the concentration risk in the market, a good active fund may present a better opportunity than the simplicity of the EWI. Simplicity holds a premium, all else equal. However, as Einstein mentioned "Everything should be made as simple as possible, but not simpler." The meaningful risks the EWI represents needs to be considered explicitly and intentionally rather than as a price to pay for simplicity.

As noted by David Hsu at Vanguard, “Equally-weighting changes the risks - it doesn't remove them”.

Q1 2025 Update & Fund Commentary

Our Quarterly Commentary aims to carry and share the bulk of our reflections and analysis of the previous quarter. To help cater to your preferences, we've provided various avenues for navigating through an entire Quarter's worth of news and data.

You can view the full recorded feedback session (± 1 hour 10 minutes) here for a deep dive into the last quarter
The presentation slides are also linked below
And for the real meat, scroll a little further to find the full detailed commentaries on both South African (9 pages) and Global markets (7 pages) and portfolios
To catch up on past insights, please visit our blog for a recap of previous commentaries.

And, of course, if you'd like to engage in further discussion, please don't hesitate to reach out. We're always here and ready to chat.

PortfolioMetrix Recorded feedback session

The PortfolioMetrix team has recorded their feedback session, discussing a few key aspects from this last quarter. We trust you'll enjoy and find this summarised commentary valuable.