Risk and the importance of diversified portfolio

During October, new geopolitical hotspots flared up in the world when Hamas launched large-scale attacks on Israel. Once again, we have a tragic event in our present day with many casualties on both sides. There is also an imminent risk that more countries will get involved, and an even larger war will strike the world.

It is always challenging to transition to finance after writing about war and casualties. So far, one can note that stock markets have been generally downbeat but not really catastrophic. Gold has been relatively strong, as have other investments that are considered a "safe haven" during times of unrest.

Some exciting news from the month is that another significant investment from a European pension fund of SEK 286 million (EUR 26 million) was made in AuAg Gold Mining. This brought the fund's total Assets Under Management (AUM) to a new record level. At the same time, AuAg's total AUM surpassed SEK 2 billion (EUR 182 million), which is a significant milestone for us.

In AuAg Thoughts below, we address the issue of concentration risk and the importance of having a diversified portfolio for one's investments.

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Here are a few media links from the past month:

Investment Solutions

Click on one of the funds below to get to the respective fund page. There you can find more information, such as: how to invest, the updated fund sheets (under "Documents"), and the live ticker price on the holdings.

AuAg Thoughts

In this monthly letter, we want to focus a bit on the extreme concentration of the seven largest stocks in the S&P 500 that are back in the spotlight. Concentration risk is a phenomenon that typically occurs at market tops, and it's a management risk that all investors should be aware of.
The seven companies; Apple, Microsoft, Amazon, Google, Nvidia, Tesla, and Meta, now called "the magnificent seven", went over a 10-year period up to 2022, from less than 10% to almost 30% of the entire S&P500.
Then came the sharp correction in 2022, where these companies as a group fell about -40% (USD), which should be compared to a drop of 14% for the other 493 companies. After this mini-crash, their share was down to about 20% of the S&P 500.
Now, in 2023, these seven companies have been everyone's "darlings" again, and in connection with the AI hype, they have also seen significant upward corrections. These seven companies have once again reached the level of being about 30% of the entire S&P500.
Their P/E ratio (valuation) is now twice as high as the other 493 companies. Another issue is that all seven companies come from the same sector, big-tech. Never has so much liquidity been drawn into so few stocks, and the risk could turn out to be a black hole for capital. This could weigh down returns in many portfolios and increase volatility, given their high correlation with each other.
To put it another way, for every dollar invested in an S&P 500 index today, almost 30 cents goes to seven stocks, and the remaining 70 cents go to the other 493 stocks.
We have now begun to see some vulnerability in both Nvidia (-10% and over 100 billion USD in market value in just a few days) in the wake of the US trade war with China and also Google's sharp drop (-9% in one day) after their latest report.
Value companies and low-valued sectors may never have looked better from a relative perspective. Especially now, with the apparent risks present in the extremely concentrated American indices by big-tech.
Using diversification in one's portfolio, with assets that have low correlation, is always important. But especially now when the concentration risk in the market and the geopolitical risk is so high. We conclude with the famous words from the Nobel Prize-winning Harry Markowitz who passed this year (Modern Portfolio Theory 1990) "Diversification is the only free lunch."

AuAg Trends

The Broughton Suspension Bridge, built in 1826 in England, was one of Europe's first suspension bridges. On April 12, 1831, the bridge collapsed due to mechanical resonance caused by soldiers marching in step. As a result of the incident, the British army ordered troops to "break step" when crossing a bridge. A similar event occurred just 23 years ago involving the Millennium Bridge (2000) in
London but with a sideways movement. Those who designed the bridge had not anticipated the effects of pedestrians immediately moving with the bridge. When the bridge swayed to one side, pedestrians adjusted to prevent falling, and everyone did so simultaneously. Then, there was the same swaying to the other side and back again. The effect is similar to soldiers marching, but here as a horizontal movement instead.