While the S&P 500 is a market cap weighted index, so the stocks with the largest market caps have the greatest influence on its movement.
Well, the stocks driving the S&P Ford are the mag 7 names along with Berkshire Hathaway and Broadcom.
Now the index is up 7% a year to date, so a traditional ETF tracking, the S&P is likely performing well, but as the name suggests, the index is broad and there are opportunities. is outside the expensive household names, and that's why some investors turn to active managed funds that seek to outperform the market.
Joining me this morning to break this down is Andrew Choi, portfolio manager at Parnassus Investments.
Good morning, Andrew.
Thank you so much for joining me.
Well, with the S&P 500 up 7% year to date, what advantages do you actively manage ETFs offer traders when the S&P is performing well?
Yeah, sure.
So I think the first and foremost, um, it's great to be here.
So my name is Andrew, portfolio manager at Parnassus Investments, and you know I manage the core select ETF which is a pretty concentrated version of a of a large cap, you know, core expression of of US stocks benchmarked against the S&P 500.
And as you mentioned, you know, the top 10 of the S&P 500, it's almost 40% of the index, and I think if without active management and the ability to look different and concentrate against your highest conviction ideas, it's very difficult to actually generate our performance in an environment like this, especially when the economy favors scale and it favors a select few companies that have a lot of Uh, you know, scale advantages and the ability to invest behind trends like AI as we're seeing this year.
So for example, our portfolio's top 10 holdings is almost 60% of the portfolio, and I think you know the ability to do that and to look different in a big way is one of the key advantages I'd say for for active management and active ETFs.
And give us an understanding of why your fund is interested in sustainable investments and what this actually looks like.
Sure, so actually, you know, the way we integrate sustainability into the investment processes, you know, it's basically thinking longer term and making sure that we're investing behind businesses that are really high quality.
So things that we think about are, you know, businesses competitive advantage, you know. team, the relevancy of the business, and I think more than ever, especially with the advent of artificial intelligence and new business models, traditional modes and competitive advantages are basically under attack all over the place, and I think sustainability just means that we consider all of the different factors that Play into a business's long term performance, so that's, you know, the way it orients within society, the amount of value that it creates relative to how much it captures the governance structure that governs the incentives in the business from the management all the way to the shareholders and the.
Employees, um, you know, and, and the impact it has on the ecosystem in which it operates.
So all of these factors contribute to how we appraise and value a business, and it goes beyond just the next year or the year after P&L, which are obviously important, but we try to think about the long term as well.
Well, when we take a step back and look at the macro environment, whether we're talking about data points or say the interest rate outlook, how might investors actually consider structuring their portfolios?
Sure, it's we're in a pretty delicate balance right now, so we have, you know, some decelerating inflation in some areas, and clearly that's a debate of whether inflation will pick back up a labor market that's still relatively resilient, you know, we have restrictive but you know, expected to peak sort of interest rates here that have rolled over a bit.
You've got an economy that's still relatively humming, so you know, I think the Fed is a bit cautious in terms of how quickly they're they're able to cut just given some of the signals that are coming out.
So if you put all these things together with, you know, labor markets that are relatively robust, maybe softening on the margins, you know, the interest rates that are still relatively restrictive, but in a secular trend behind the AI that's driving a lot of investment and risk appetite clearly.
I mean, we've seen a 20% drawdown this year and a 30% basically recovery off the bottom.
So despite the market being up just, you know, high single digits, you.
To date, it doesn't tell the full story, so there's clearly some volatility on the margin here.
And I think as investors it's important to really honestly at this point, you know, beta, beta exposure might have got you here, but it's more important to focus on the idiosyncratic and alpha stories.
So you know, again, as I mentioned before, a lot of competitive advantages are being challenged.
It's really important to kind of focus on the quality factors that Allow businesses to have pricing power over a long term um and have business models that are not going to be impacted regardless of, um, you know, the, the advent of new technologies like generative AI.
OK, we have less than 30 seconds here, but what are some of the most compelling opportunities you see in this market?
Yeah, I think you know what I'd say here is we're not too creative when it comes to the things that invest behind.
I think at this point we really stick to things that we know are most likely to change and most likely not to change.
So I'd say AI is still a very durable trend that is likely to change a lot of end markets.
So.
From the hyper scalers, you know, whether it's Microsoft, Alphabet, Amazon, the big data center infrastructure owners, all the way down to different innovators in life sciences, tools like Danner and Thermo Fisher, you know, that are also going to benefit from the use of technologies like AI and then the other, sorry to interrupt, but we will have to leave it there today.
Thank you so much for joining me.
