New Zealand’s stock market offers a valuable lesson for U.S. investors, highlighting the risks and rewards associated with a top-heavy market. With just a handful of major companies dominating the market, New Zealand stands out as one of the most top-heavy stock markets globally.
The MSCI New Zealand IMI 25/50 Index
The MSCI New Zealand IMI 25/50 Index is designed to track the performance of various segments of the New Zealand market, including large, mid, and small-cap companies. However, one company, Fisher & Paykel Healthcare (FPH), holds almost one-quarter of the index’s weight. In comparison, the largest stock in the S&P 500, Microsoft (MSFT), accounts for only 7.3%.
A Dominant Few
Fisher & Paykel is not an isolated case. Auckland International Airport (AIA), the second-largest company in the MSCI New Zealand index, holds a weight of 22%. On the other hand, Apple (AAPL), the second-largest stock in the S&P 500, represents only 6.5% of the index. Furthermore, the top five companies in the New Zealand index make up over 60% of its value, while the top five in the S&P 500 represent roughly 25%.
Historical Context
The New Zealand stock market has not always been dominated by large corporations. However, throughout its history, market capitalization distribution has been heavily skewed. A century ago, the country’s economy relied primarily on a few key products, such as wool, meat, and dairy.
Understanding the dynamics and performance of a top-heavy market like New Zealand’s stock market can provide valuable insights for investors worldwide. By recognizing and analyzing such trends, investors can better navigate their own portfolios and make informed decisions for long-term success.
The Impact of Skewed Market-Cap Distributions
To truly comprehend the significance of a skewed distribution, one must acknowledge the substantial difference it has made in the United States, a market with a relatively equal weighting. According to Morningstar, the market-cap-weighted S&P 500, which is dominated by its largest companies, has yielded a remarkable total return of 23.2% over the past year. In stark contrast, the equal-weight version of the S&P 500 only managed a return of 6.4%.
It is worth noting that the effects of skewed market-cap distributions can work in both advantageous and detrimental ways. New Zealand, for instance, has witnessed exceptional long-term performance due to this phenomenon. According to the UBS yearbook, the country’s stock market has delivered one of the best returns since 1900 compared to any other market worldwide. To gain a visual understanding of this remarkable performance, refer to the chart provided.
However, it is important to recognize that concentration can also result in underwhelming market performance. In recent years, New Zealand’s market has experienced this very setback. The iShares MSCI New Zealand exchange-traded fund (ENZL) has lagged behind the Vanguard Total World Stock ETF (VT) by 24 percentage points over the past year and approximately 9 percentage points over the past five years.
This highlights the crucial investment implication: it is imperative to comprehend what you are investing in when selecting a market-cap-weighted index. While it may seem like you are investing in a broad representation of all the companies within that index, you are essentially investing in a handful of dominant large companies. This is not necessarily a negative approach, but it is fundamentally distinct from investing in equal-sized pieces of numerous companies.
Remember: Historical trends indicate that betting against the biggest stocks has often been lucrative.
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