Ollie Smith: Now, there is no doubt that the White House’s program of tariffs has upended decades of global free trade. But it’s also posed some interesting questions about investment, diversification, and the risk of putting money into US equities.
One of the ways investors have been monitoring the ongoing impact of this policy is through fund flow data. And one of those people is Morningstar manager research analyst Michael Born, who joins me now. Michael thank you so much for being with us. Just first and foremost, what is the fund flow data showing us at the moment?
Is the Magnificent 7 Era Over?
Michael Born: I think probably the best characterization would be that investors are really looking for diversification. You saw huge outflows from US large cap growth equities, and some mid and small caps there too.
And you know big inflows into global funds into [emerging markets] and Europe as well as fixed income. So I guess investors are really trying to broaden out their exposure. I should also say that you saw the largest inflows of an equity category into large blend funds. So really I think you’re seeing a rebalancing away from large cap growth stocks in general.
Ollie Smith: Let’s talk about “TINA” for a second because over the last decade or more, we’ve had this agenda—an investing agenda—that’s focused around big US companies and the value of US equities. And that’s been summarized by “TINA”. You know, “there is no alternative”. I have to ask you, as sinister as it sounds, is “TINA” dead?
Michael Born: You could say there are plenty of alternatives. You just need to look at the statistic that over the last three years European banks have outperformed US technology stocks. I’m not not advocating that investors should put all their money into that bet, but, you know, whether it’s green shoots in the European economy, some successful, top-down policy in China, or, you know, strong performance across many markets, or to look at something like gold and other commodities seeing strong performance. Now, I guess what needs to be disentangled is, when you look at American exceptionalism, I think the data still suggests there is [still] something there. But, you know, we have questions over how much of that is just the AI narrative as opposed to the US economy as a whole. But I do think, you know, looking at the flow data, there are alternatives – that’s where investors have been looking over this period.
Magnificent 7 Stocks Cause Active Managers a Headache
Ollie Smith: And if you were a professional money manager and you’re looking at the Magnificent Seven specifically, there are some interesting things going on here. Our colleague Monika Calay was talking about this on LinkedIn and pointing out some of the ways in which exposure to The Magnificent Seven throughout this period of tumultuous whipsawing of the markets has really affected returns and changed the way that managers need to allocate money. Do you think managers are having quite a difficult time managing their Magnificent Seven exposure?
Michael Born: Yes, I think it’s been very challenging. I mean, one thing to say here is that, you know, as a story it’s still got room to play. I mean, you just saw results out last week from Microsoft MSFT. We’re seeing that translate into strong revenue growth. But you know, going forward I think the consensus is that these massive growth rates are just going to moderate to more normal levels.
And then I would I think we would expect that stock selection is just going to play a much bigger role. All you need to do is look at the year-to-date performance of the individual components of the Magnificent Seven. You can see really quite disparate stories there. You’ve seen this over the last few years where stocks like Alphabet GOOGL and Apple AAPL have been viewed as kind of AI losers. What does this mean? Because these trends still have room to run.
How Comfortable Are Investors Being Overweight US Stocks?
Michael Born: We did some research last year that kind of suggested that you really need to have a market weight or an overweight position in these stocks when you get this kind of market environment that’s being led particularly from the top stocks. It’s basically that you can’t outperform unless you’re overweight or market weight these names. When the S&P 500 already has 7% in Nvidia NVDA, how comfortable are you being overweight? I think managers really have to evaluate balancing a need for diversification with understanding how much of this trend is going to play out and who’s best placed to capture results, which means more research basically.
Ollie Smith: So in short, then, it’s harder than ever to be properly diversified.
Michael Born: Oh no doubt.
Ollie Smith: Thank you so much, Michael. For more on this unfolding story. Do be sure to follow Michael’s work as a manager research analyst. But also check out the new Morningstar.co.uk website and daily newsletter, which brings you the latest analysis and news on the unfolding tariff situation. Until next time, my thanks to Michael again. I’ve been Ollie Smith for Morningstar.
