While lots of retirement plan participants take the minimum action when it comes to the investments in their retirement accounts, there are times it particularly pays to be vigilant—and this is one of them.
Why? Emerging market tech stocks. According to a Reuters report, a boom in that sector is causing problems for fund managers.
And that problem could become one for retirement plan participants, too, if they don’t keep their eyes open.
It seems that the market capitalization of a small group of tech companies has pulled so far away from the pack that the funds owning them are becoming overweighted.
That goes for both index funds and the funds of active managers, since as the MSCI emerging equities index soars, active managers are also buying the same stocks to capture their returns.
What that means is that everyone is suddenly a player in emerging markets tech stocks—and heaven help all of them if that sector suddenly takes a dive.
“It’s the opposite of what you are trying to do with an ETF—you want cheap diversified exposure but you end up being concentrated in basically 10 stocks,” Rory McPherson, head of investment strategy at Psigma, which holds active EM funds, is quoted saying in the report.
The biggest five emerging market companies in the index are tech firms Alibaba, Tencent, Samsung, Naspers and Taiwan Semiconductor; just those five comprise nearly 19 percent of the index’s market capitalization.
And that’s more than the five top firms on the S&P 500 have captured on that index—together, Alphabet, Apple, Facebook, Microsoft, and Amazon make up just 13 percent of the S&P 500 index.
Oh, and those five EM companies?
Only as far back as January, they made up only 13.9 percent of the index. Growth has been heady since them.
As ETFs capture more of the market (in many cases, in a drive to cut fund management fees, which has made them a popular and growing segment of the retirement market), valuations have risen, following the index weightings.
And that means that if there should be a hiccup in the sector, lots and lots of people who may be totally oblivious to what’s in their accounts could be in for a world of hurt.
But so could people who watch their accounts yet fail to rebalance their portfolios. According to the report, Lipper data indicate that emerging equity funds have received some $56 billion so far this year, with $23 billion of that going into ETFs.
And while many investors love disruptive tech companies—which exert such disruption in sectors from media and advertising to retail and industrials, others aren’t so happy.
In fact, dependence on technology for returns is making some of them very uncomfortable; they’d rather be invested in emerging market car or beverage makers to gain exposure to consumer demand in the developing world.
Either way, whether retirement assets are held in ETFs or in actively managed funds whose managers are busy chasing returns, retirement plan participants need to be aware of what their holdings are and be prepared to take action, perhaps by rebalancing their portfolios—particularly since Lipper data also indicate that 746 emerging market funds liquidated in the last five years.