Overweight Equities: Appropriate Or Reckless?

Gutmann portfolio management has been overweight in equities since September 2022. But what does “overweight” mean? 

In the Gutmann “taking-measure” process, we determine the strategic equity weighting in the portfolio individually with each client. In other words, the equity quota that is targeted in the portfolio over the cycle, for example 40%, 60% or 80%. In these cases, overweighting equities in most portfolios means 45%, 65% and 85%. Due to price gains, the current ratio is even higher than these percentages.

We are convinced that investors who strategically plan to invest 60% in equities should move between 50% and 70% during the investment period. We advise against disproportionate changes downwards or upwards. None of us can see into the future. And emotions are usually a bad advisor when it comes to investments. 

What about the stock market valuation? 

The best-known and most important stock index in the world comprises the largest 500 companies in the USA by market capitalization. Relative to its history, the index is trading on the upper end of its valuation range. Gutmann is deliberately not invested in this index. I also always warn against the informative value of an average. We prefer to focus on individual companies and analyze whether their absolute valuation promises an attractive long-term return. 

Can we negate the general stock valuation? No, not at all. I always compare it to the climate in which we live in. Has this climate influenced our strategy? Has it built up risks in the portfolio? My Gutmann Viewpoint newsletter from the previous week describes how we have actively reduced concentration risks in our core equity strategy.

Within Gutmann portfolio management's equity portfolio, we do not see significantly increased valuations. Key figures such as the price/earnings ratio or the free cash flow yield have remained relatively stable over the last 5 years. This is also related to our active management of the equity strategies.

Experience tells us that any attempt to guess the high in the stock market in order to buy again after the correction is doomed to failure. Because even if you are lucky, when do you buy again? How deep does the correction go, is it only 10% or 15%? Or does a full-blown bear market develop? Statistically, a 15% setback is to be expected in every single year. What is meant is the price setback from the year's high to the subsequent low. I advocate bravely enduring this fluctuation and not panicking. 

Do we never sell equities then? Not at all. We monitor various indicators to identify market risks and be able to react. Are market participants in a euphoric mood? Have we reached extreme points? Only when these indicators light up red is it time to reduce equity risk. However, we do not make any hasty moves. We guide our clients through stormy times with discipline and experience.