I-Maps typically uses a five-year return period to calculate the security coordinates shown on a map. As the Covid crash and recovery fall out of that window, the global map is beginning to change.
The broad structure remains recognisable, but distances and relative groupings have adjusted — a useful reminder that the investment landscape evolves slowly over time.
The earlier map
Last year: the Covid crash
A year ago, the five-year period still included the Covid crash of March 2020. Because that period was so extreme, it had a strong effect on both the correlations and the tracking errors shown on the map.
Different parts of the market experienced Covid very differently. Energy, Industrials and Financials had some of the sharpest falls, followed by slower recoveries. More defensive sectors, such as Health Care and Consumer Staples, had smaller falls and steadier recoveries. The Tech/Growth sectors — Information Technology, Communication Services and Consumer Discretionary — had medium-sized falls, but recovered quickly and then continued strongly. Many virtual and online businesses benefited while the world was stuck at home.
On the Point of View map, this created three fairly clear groups: Financials/Industrials on the left, Defensives at the bottom, and Tech/Growth in the top-right. There was a visible gap between the Covid winners — the virtual and growth-orientated businesses — and the Covid losers — the financial and real-world production businesses.
The Covid period also pushed up tracking errors for many securities, which is reflected in greater distances from the origin. This was particularly visible for shares such as Tesla and Palantir, which sat far from the centre of the map.
Five years later
Today: when Covid falls out of the map
With the Covid crash and recovery no longer included in the five-year return history, the Point of View map of the largest global shares looks slightly different. The broad structure is still recognisable, but the positions have shifted.
The gap between Tech/Growth and Financials/Industrials has narrowed. They are still visible as different areas of the map, but they have moved closer together. In other words, the gap between the virtual and the real world has started to close.
The clearer contrast now appears to be between Tech/Growth and Defensives. Defensives have shifted from the bottom of the map towards the bottom-left. Relative to the benchmark, they now sit directly opposite Tech/Growth.
Tracking errors have also dropped across the board. Palantir, for example, has dropped from 68% to 58%.
Portfolio implications
What this means for fund managers
For fund managers, this is a useful reminder that the investment landscape is not fixed. The correlations, volatilities and tracking errors that make up the market structure can adjust slowly over time.
This matters for portfolio construction. A portfolio may have similar holdings and weights to last year, but the investment environment may have changed. The gap between Tech/Growth and Financials/Industrials has narrowed. This means that some previously contrasting positions are no longer as clearly offsetting. At the same time, the relative opposition between Tech/Growth and Defensives may now be more important when considering offsetting positions.
The question is not only what securities a portfolio holds, or what its biggest tilts are. It is also how those securities are currently positioned.
Closing thoughts
The changes are relatively small, and the global map remains broadly stable. Even so, the gradual movement matters: relationships that once looked strongly opposed may become less distinct, while other contrasts become more useful for understanding portfolio positioning.
We would be glad to hear any thoughts or questions about the analysis.