Investors know they have too much technology. This analysis shows that it is worse than they think.


Investors have long been concerned about the handful of tech companies that make up a large portion of the S&P 500 and, therefore, their equity portfolios.

Turns out they may have reason to be concerned: New analysis has found investors actually have almost 15% more exposure to technology than the amount indicated by the most commonly used metrics.

A forthcoming article from data science firm Syntax Advisors titled “Do You Know What You Have?” What is the real share of technology in the S&P 500? Shows that as of September 30, the portfolios of institutional and other investors that use market capitalization-weighted index funds linked to the S&P 500 had a technology exposure rate of 42%. In contrast, most traditional metrics – which typically group companies into broad sectors such as information technology, industrials, and finance – place technology exposure in the S&P 500 at 27.6%.

As pension funds and other large institutions have adopted index funds for at least part of their equity portfolios, many of them now face new risks. One of the criticisms of funds that track indices like the S&P 500, which is weighted by the market capitalization of its stocks, is that the benchmark has focused on the more expensive components – think Alphabet, Apple and Microsoft, for example. Investors are therefore less diversified than they think and more exposed to a potential drop in these values.

Syntax’s systems were designed to address what it considers to be weaknesses in a commonly used method called GICS, or the Global Industry Classification System, which groups companies in high-level industries long used by analysts. and Wall Street bankers. Syntax’s methodology, on the other hand, profiles companies by taking an in-depth look at their product lines and other activities to show how different security categorization systems can underestimate or overestimate a portfolio’s biases. . This is a tool that can be important at a time when investors are increasingly looking for more precise ways to understand and quantify the risks of their portfolios, especially if they are using sector weights as a proxy when determining. more important decisions on investment policy and asset allocation.

While most CEOs would say their strategies are to some degree driven by technology, Syntax’s research allows companies to dig even deeper and understand more clearly the risks that a general technology downturn could have on their product lines. products, their divisions or even their research and development. efforts.

“It’s a concentrated profession, not a diversified profession,” said Simon Whitten, product strategist at Syntax. Technology risk in the S&P 500 is “much higher now than it was in the tech bubble. Technology is now like finance [were] in 08. Whitten, who worked in the industry for 17 years, including a stint as managing director of State Street, where he established the research program, explained that financiers have entered the wider market in the years leading up to the global financial crisis the same way. this technology has infiltrated most industries today.

“If there is a change in sentiment about the technology, it will take out 42% of the market,” he said. And the technology has already tested investors. In early October, technology companies fell sharply, with interactive media and services down 3.08%, semiconductors down 2.76% and software down 2.29%. At the same time, according to the report, the broad market fell only 1.30% and the average stock fell only 0.63%.

Paul Kenney, head of product development and customer solutions at Syntax, spent nearly 20 years with consultant NEPC and managed the Ford Motor Company pension plan before joining Syntax in May. As he said, “the sectors were once okay, but the world has changed”. Whitten and Kenney both pointed out that when sentiment for tech changes, tech stocks trade in tandem and fall more than the broader market. This is where the syntax comes in. “We are aiming for a more precise way to measure the size [tech stocks] are, “said Whitten,” and [then answering the question,] when is big too big?

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