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American Resilience Model Portfolio

Monthly Portfolio Review: June 2024

Publication date: July 2, 2024

Current portfolio holdings

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Executive summary

• The S&P 500 returned approximately 3.6% in the month of June; we estimate approximately 3% of that return was attributable to “Mag Seven” stocks as the tech sector significantly outperformed.

• The American Resilience portfolio delivered a marginally positive return and outperformed the S&P 500 Equal Weighted Index, which was marginally negative.

• We discuss the relevance of market concentration on broader market performance this month and in a historical context.

• The portfolio saw good returns from Roper Technologies (ROP), Costco (COST) and S&P Global (SPGI), while Visa (V) shares drifted.

• There were no material drawdowns in the portfolio.

Performance review

During the month of June, the American Resilience portfolio generated a marginally positive return of 0.2%. This compares to a total return of the S&P 500 Index of approximately 3.6%. Individual position returns across the portfolio ranged from -4% for Visa (V) to 6% for Roper Technologies (ROP).

We generally use the S&P 500 Index as a reference point for interpreting month to month performance. It is the most prominent U.S. stock market index and is very widely owned through passive funds. But a month like June 2024 highlights a number of important considerations associated with using the S&P 500 as a performance benchmark, especially over short time frames.

The S&P 500 Index is market capitalization weighted, like most major market indices (with the price weighted Dow Jones Industrial Average being a very antiquated exception). This means that the more valuable a company is, the higher its weight within the index.

The theory behind market capitalization weighted indices is that they reflect the allocation of all investors to the relevant investment universe. The point is to mimic the positioning of the average investor.

Winner-take-all

Over time, the S&P 500 Index has become increasingly concentrated in a handful of “mega cap” stocks, the vast majority of which are technology stocks or at least technology-related. There are many potential explanations for this, but one that we find quite compelling is the thesis laid out over 25 years ago in a well-received business book called The Gorilla Game by Geoffrey A. Moore.  

Moore describes what he calls the “tornado theory.” A “tornado” is a “compressed period of hypergrowth” that “creates a unique set of marketplace dynamics that frequently will catapult a single company into a position of overwhelmingly dominant competitive advantage,” which then allows the company to “generate exceptional returns to its investors for an unusually extended period.”

Over the past several decades, a handful of technology-related stocks have become immensely valuable (arguably because of this “winner-take-all” tendency within the technology space). These stocks now have disproportionate representation within the S&P 500 Index and often dominate its returns.

Investors have given various names to these market bellwethers. “FAANGs” was popular for a while, but then Facebook changed its name to Meta, Google officially became Alphabet and Netflix subsided in importance. Today, “Magnificent Seven” is most commonly used.

“Mag Seven” representation in S&P 500 ETF (SPY) (Source: FactSet)

The Magnificent Seven at the moment do not perfectly match the market cap leaders of the S&P 500, as Tesla has slipped down the list. But Mag Seven is still a useful shorthand for understanding market concentration.

In June 2024, the Mag Seven performed exceptionally well and delivered the vast majority of the 3.6% total return of the index. We estimate the contribution was approximately 3%.

Conveniently, an ETF has been created, called the Roundhill Magnificent Seven ETF (MAGS), that tracks the Mag Seven on an equal-weighted basis. We can see the profound impact that Mag Seven stocks had on the S&P 500 Index in June by comparing the performance of this ETF versus the index.

The importance of the Mag Seven, and the largest market capitalization stocks in general, to the June performance outcome is also visible in the relative performance of the S&P 500 versus the S&P 500 Equal Weighted Index. Rather than assigning a weighting based on relative market cap, the Equal Weighted Index simply gives all stocks within the index the same allocation.

On an equal weighted basis, the S&P 500 declined in June by approximately 0.5% and lagged the market-cap weighted return by approximately 4%.

To some extent, the outperformance of large market cap stocks simply reflects the outperformance of the technology sector, even though most of the Mag Seven names are not technically classified as “Information Technology” under the Global Industry Classification Standard used by S&P.

AMZN and TSLA are considered “Consumer Discretionary,” while META and GOOG/GOOGL are considered “Communication Services.” Yet because these names are fundamentally technology platform companies, they have a tendency to trade in sympathy with tech stocks rather than their sector peers.

On a sector basis, as we review the various SPDR sector ETFs, it is perhaps no surprise that Technology stocks led the way in June. Notably, Consumer Discretionary and Communication Services followed, thanks in no small part to the Mag Seven stocks that are heavily represented in those sectors.

There is no question, ever since the end of 2022, exposure to mega cap technology has been favorable. This is a stark contrast with the experience of investors in 2022, when the tech sector crashed. In 2022, the S&P 500 Equal Weighted declined 11.5%, whereas the S&P 500 declined 18.1%.

Keeping this historical perspective in mind is helpful in periods when the mega cap juggernauts of the S&P 500 have momentum. Even with benefit of the past 18 months of NVIDIA-led outperformance, over the past 20 years, the S&P 500 on a market cap weighted basis has produced similar returns as the equal weighted version. Remarkably, the market cap weighted version of the index has only now caught up to the equal weighted version over a twenty year time frame.

Relevance for American Resilience

As we assembled the American Resilience Model Portfolio, we considered whether or not we should have some or any Mag Seven exposure. In particular, we contemplated NVIDIA (NVDA), a stock that we have written and spoken about at some length since the launch of 76research.

While in retrospect, having Mag Seven (in particular NVDA) exposure over the past several months would have been helpful to returns, one of the reasons we have avoided mega cap names within the portfolio is that these stocks are likely already well-represented in the portfolios of our subscribers.

Most stock market investors tend to have significant index exposure through ownership of passive funds or ETFs (which feature prominently in 401k and other retirement plans, for example). Because of the long-term success of large cap technology stocks in particular, investors with exposure to growth-oriented vehicles like the Nasdaq 100 (QQQ) may have very substantial exposure to Mag Seven names.

We have nothing against passive investment approaches, skewed as they may be to a handful of highly valuable, technology-related growth stocks. But rather than reinforce the large exposure to these stocks which our subscribers may likely already have, we focus instead on investment opportunities that we believe are complementary.

Portfolio highlights

Within the American Resilience portfolio, returns were led by Roper Technologies (ROP), which delivered a 6% total return, followed by Costco (COST) at 5% and S&P Global (SPGI) at 4%. The most notable detractor was Visa (V) at -4%.

ROP continues to execute on its strategy of developing a diversified portfolio of niche software businesses that generate recurring contractual revenue streams. The shares continue to have momentum following the end of April earnings report, in which the company raised its outlook and reaffirmed double digit growth expectations across metrics. ROP is not a pure AI play, but its software solutions are increasingly incorporating AI functionalities, a trend that will likely persist and help sustain its growth trajectory.

COST continues to benefit from a perception that its positioning as a value retailer that caters to a relatively more affluent customer base is uniquely well-suited for the current inflationary environment. COST shares benefited on the margin from mid-month retail foot traffic reports.

Financial information service provider SPGI has seen some uplift from the introduction of AI tools across its product portfolio. A new CEO was announced to replace the current CEO, who previously announced his retirement. This news came a bit earlier than anticipated but was taken in stride by investors.

V has been an exceptional long-term compounder, thanks to its duopolistic claim to the structurally growing payment processing niche along with Mastercard (MA). Shares have drifted somewhat this year, in part due to concerns about additional regulatory pressure and in part due to a lack of direct relevance to AI themes. We are encouraged, however, by a recent development that would extend V’s ability to operate with domestic consumers in China.

Key metrics

Valuation detail

Performance detail

Company snapshots

Air Products & Chemicals (APD)

Roper Technologies (ROP)

S&P Global (SPGI)

Stryker (SYK)

Texas Instruments (TXN)

Union Pacific (UNP)

Visa (V)

Arch Capital Group (ACGL)

Costco Wholesale (COST)

GXO Logistics (GXO)

Thermo Fisher Scientific (TMO)

Vulcan Materials (VMC)

Williams Companies (WMB)

The 76research American Resilience Model Portfolio is designed to provide exposure to businesses that operate with competitive advantages in structurally attractive markets. The objective is to identify businesses that can survive and thrive across different macroeconomic environments and whatever geopolitical crises may unfold. The holdings are intended as long-term investments to drive portfolio compounding with minimal need to realize taxable gains. Emphasis is placed on critical markers of business quality such as barriers to entry, physical scarcity of assets, balance sheet strength, effective capital allocation and durable long-term growth drivers. These assessments are paired with careful consideration of valuation, risk and embedded expectations.    

Disclaimer

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