Breadth Thrusts & Bread Crusts: Dad Was Right After All.

JC Parets
January 13, 2022

From the desk of Willie Delwiche.

Don't judge a book by its cover is sage advice I'm sure we've all heard from a parent, teacher or mentor at some point in our lives. 

The message is clear. We’re not supposed to read a title or see a label and jump to conclusions. It's always better to get inside and see what something’s all about before deciding to embrace or reject it.

We’re seeing this play out in the market in several ways right now.

First, when it comes to ESG (Environmental, Social, and Governance) investing, fund labels are often useless. Definitions vary. Where there are any standards at all, they tend to be wildly inconsistent. From my perspective, ESG is more about virtue-signalling than sound investment advice. It becomes the opposite of the old adage – a request to simply look at the cover and not read the book.

Next, the leadership rotation in the market (away from Tech and toward Energy and Financials) is a reminder to investors to look under the hood to see how various indexes are constructed. 

An investor in an S&P 500 index fund has nearly 10 times the exposure to Technology as they have to Energy. Moving toward an equal-weight version (such as RSP) brings less exposure to Tech and other Growth sectors and increases exposure to the Value sectors that have started to heat up.

A similar theme emerges when looking at the US vs Europe (or the UK in particular). Moving away from the US reduces Tech exposure and increases Value exposure.

The lesson here is straightforward: Fund companies are in the business of attracting assets and are not beyond using an enticing name to increase its appeal. Even among broadly-based funds, sector exposure varies dramatically. 

It's up to investors (and their advisors) to look beyond the labels and titles. As our parents liked to tell us (and what I find myself telling my kids), it's what's on the inside that really counts. I guess my dad was right all along.

Sincerely, 

Willie Delwiche 

PS: On the subject of books, several of us at All Star Charts are going to be reading Aldous Huxley's "Brave New World". Hopefully, we’ll even get together to discuss it. 

I'm not sure if an All Star Charts Book Club is in the works, but you never know. Stay tuned. 

In the meantime, I'd encourage you to get a copy of this classic and read along with us. If you've got other ideas of great works that are worth a read (or a re-read), drop us a line and let us know.

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