By design, market capitalization-weighted indices increase allocations to assets as their prices rise. This forces investors to continuously buy more of what has already performed well, leading to concentration in popular, often expensive, assets and sectors from the previous market cycle.
A robust global value strategy first identifies the world's most undervalued countries using long-term metrics. It then performs a bottom-up analysis to select the most undervalued large-cap stocks within those cheap markets, creating a concentrated portfolio of out-of-favor opportunities.
A GMO study from 1957-2023 found the top 10 S&P 500 stocks underperformed the remaining 490 by 2.4% annually. The last decade's outperformance by mega-caps is a significant departure from this long-term trend, suggesting a potential reversion to the mean.
A global value strategy has two components. Defensively, it avoids the most expensive markets, mitigating valuation risk. Offensively, it allocates capital to cheaper, neglected markets, positioning the portfolio to capture significant upside when market sentiment eventually rotates.
A year of massive returns in an out-of-favor asset class should not be extrapolated as a future trend. Instead, it serves as a powerful signal that market leadership is rotating and that neglected, undervalued areas can 'come back to life very quickly' when sentiment flips.