Over the past few months a number of people have mentioned, usually in passing, that they have capital sitting somewhere other than where we can see it. A 401(k), an old employer plan, a rollover IRA. And then they’ve asked whether we’d mind having a look at it.
So we looked.
And then we looked at a lot of them, because the first few were concerning enough that we wanted to know whether they were unusual.
They weren’t.
They’re all more or less the same, and what’s in them is bad enough that we recorded a presentation about it (if you’d rather a PDF to read, download it here).
What’s actually in there?
Take somebody around fifty, retiring in 2040. What they typically get is a target-date fund holding roughly 45% US equities, 29% international equities, 24% fixed income, and in a lot of plans a slice of private equity alongside it.
Four things. Which is what most people mean when they say they’re diversified.
Now look underneath it.
The US sleeve is an index fund owning thousands of companies, and it’s index tracking, so what you’re getting when it’s all said and done is the S&P 500. The usual suspects. Nvidia, Apple, Microsoft, Amazon. The top eight names come to about 30% of it.
You’d think the international sleeve gets you away from that. Its four largest holdings are Taiwan Semiconductor, Samsung, ASML and SK hynix, which are the companies manufacturing the chips the whole AI buildout runs on. So the diversification there isn’t achieving much at all.
The private equity slice was meant to diversify away from equities, and a great deal of that money is now lending to AI firms. It isn’t achieving anything either. It’s just adding risk. Worse, much of it was invested at interest rates three or four hundred basis points below today’s. As that debt gets rolled, assets have to be sold, and they won’t fetch what they’re marked at. A number of those funds have already gated, which means the investors asking for their money back are being told no.
And the bonds, the part that’s supposed to be safe, are the pivotal market, because sovereign bonds reprice everything else. These AI companies have taken on serious debt to build out their infrastructure. Rates go higher, their cost of capital goes higher, and that impairs the equity. Higher rates impair the private credit too.
Correlations are closer to 1.
People think they’re well diversified because they hold four things.
We think those four things are one position held four ways, sitting on the same balance sheets, set to reprice together. Anyone who sat through 2022, when bonds and equities went down together, has seen a smaller version of it, and there’s a good deal more leverage in the market now than there was then. Margin debt is at a record. On valuation, US stocks are the second most expensive they’ve been in history, behind only the dotcom peak and ahead of 1929.
The other thing worth noticing is what these plans don’t own. In the one we went through, energy was about 4% and basic materials about 4%. Minuscule.
If you’re not American
Most of what’s above uses a US plan, because that’s what most of the statements we were sent looked like. Don’t stop reading if you’re in the UK, Australia, New Zealand or Europe.
The exposures are much the same wherever the plan is held, because these things are almost all built out of the same handful of global index funds. If anything it’s more direct for you, because the global fund that was supposed to be your diversified option has the US market as its largest single exposure. And the bond problem isn’t a US-only trade. We could show you gilts, or JGBs, or very nearly any government bond market on the planet, and the dynamics look the same.
What we’re not saying
We’re not telling you this happens next month. We don’t know when it happens. Nobody does, and anyone telling you otherwise is guessing.
All investing is a matter of probabilities and of what those probabilities are priced at. What we can say is where things sit against every historical precedent we have, and on that basis we’re at or very close to a peak, with more leverage behind it than at any previous one.
Better to be off the beach when the tsunami comes in than on it.
Go and have a look
If you have money in a 401(k), a SIPP, a super fund or an old plan somewhere, go and look at what you’re actually invested in. Not the names of the funds. The holdings underneath them.
Most people have never done it, and it isn’t laziness. The statement gives you a fund name and stops there. Everything above came from publicly available fund data and took very little time to put together.
Three things to check.
1. What the ten largest positions actually are.
2. Whether your international fund is holding a different bet from your domestic one or the same bet further up the chain.
3. And whether any of it sits in a private vehicle, in which case find out now what the redemption terms are and whether they’ve changed.
This isn’t a moment to say “she’ll be right, I’m diversified”.
What you can do about it
We offer two options, depending on how much of this you want to do yourself.
If you’d rather run your own money, that’s what Insider is. You get the portfolios we actually hold, the research behind every position, and our thinking as it changes – not a tip sheet, but the reasoning, so you can decide for yourself what you want to own. Every position is published.
If you’re an accredited investor and would rather not do it yourself, our sister firm Glenorchy Capital runs this strategy for clients directly. Send them your retirement plan statements and they’ll go through what you’re actually holding and show you what’s in it. Minimums and eligibility are set out here.
Either way, go and look inside your own plan first.
