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The Download: 2Q 2024

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Why risk management and greater diversification should lead to future outperformance

John Maynard Keynes once famously stated, “Capital markets can stay irrational longer than you can stay solvent.”  What he didn’t say is that when the inevitable change that corrects the irrationality comes, it is advantageous to step away from the herd.

The frustration of imbalances is how long they can last. The second quarter represented more of the same for the extremely narrow U.S. market domination. If you didn’t own an inordinate allocation to U.S. Large Cap Growth stocks, you didn’t make much return for the quarter, again. However, it was not enough this quarter to have just owned U.S. large-cap stocks or even the Mag 7. We are now down to one dominant stock, NVIDIA. The magnitude of the performance of this narrow slice of the world’s marketplace has been so great that any outperformance that a portfolio may be experiencing this year or last has likely occurred due to owning more Mag 7.  For the last 10 years, just own the S&P 500 index. That’s it. There is nothing else to it.


Data as of June 30, 2024. Weight of Top 10 Stocks: JPMorgan Guide to the Markets and are based on the 10 largest index constituents at the beginning of each month.  10 Year returns ending June 30th, 2024.  Source: Morningstar

The extreme concentration of just a few stocks driving almost all of the performance of the S&P 500 index has been going on for so long now that when even looking at 10-year returns, the S&P 500 has been the only points of added value.  As for the rest of the major asset classes shown above, they experienced returns below the current yield of money markets.

In an environment such as this, there are likely three camps of investors; those that believe that this type of domination and concentration will continue (get on the train man), those that look forward and are seeking to hold valuable future assets (avoid this train wreck), and those that don’t really care at all, they just buy whatever has performed best in the past anyway (a surprisingly vast number of investors).  Depending on which camp you fall into depicts how one views past performance here.  If you think the current state of capital markets is the new norm then past performance is your guide.  Just buy investments that are dominated by the S&P 500 index.  But if you are an investment manager, it would be easy to see how past performance would mean nothing for the future in this environment.  Cautious investors might even be looking for those managers that have deviated away from this trend.

Change is constant in capital markets, and trends have a way of sucking in the most investors, at the worst possible time.  It is said, those that ignore history are destined to repeat it.  The question is, will the rules of change and the norms of history upend this past performance streak, or is the last 10 years the only history that one should be looking at?

We have been here before. During the last couple of years of the previous century, an internet stock mania had captured investors’ psyche. Much in the same way that AI is going to change the world today, the narrative back then was that the internet was going to change the world. And it did. Yet somehow, the internet stock-laden NASDAQ lost over 70% of its value from 2000-2002. The NASDAQ peaked at around 5000 in early 2000, a level not to be seen again for 16 years. Even Microsoft, which is often touted as a near-perfect company, lost about 50% of its value over ten years. As for everything else, small-cap stocks, value stocks, international stocks, emerging (submerging) stocks, and even bonds outperformed for over a decade.  While many tech stocks lost over 70% of their value, some of the most left-for-dead investments soared.


Source: YCharts. Daily Total Return. Emerging Markets = MSCI Emerging Markets Index, U.S. Large Cap = S&P 500 Index, U.S. Small Cap = S&P 600 Index. Developed xU.S. = MSCI EAFE Index, U.S. Aggregate Bonds = Bloomberg U.S. Aggregate Bond Index. Data: From market peak March 27, 2000 – March 26, 2009. ​Seven Largest Stocks in the S&P 500 on March 27, 2000.​

A subtext to the internet stock mania was that experienced and diligent investment managers would not participate in such an obvious irrationality. After all, what investment manager with any experience would place more than 30% of their clients’ hard-earned lifetime savings into just seven stocks? If portfolio managers refused to invest in the hype, then who would? Indexes. Indexes are forced to participate in every irrationality, and at an increasing rate, the longer and more imbalanced the situation becomes. This momentum factor fuels the popularity of indexes at the tail end of trends.

In the late 1990s, following over 20 years of consistent performance, First Eagle Global (one of our core holdings) started to lose AUM. Not losing money in returns – it was experiencing positive, consistent returns – but investors were redeeming from the fund. Investors were not making enough, particularly when compared to indexes that were loaded up at an increasing rate with internet stocks. The fund was performing in its usual fashion, following First Eagle’s tried-and-true process, but the perception of its performance changed due to the outperformance of one particular index, the NASDAQ. The fund ultimately lost about 50% of its AUM.  This proved to be the worst possible timing for these investors, as in early 2000, the internet stock mania came to a silent but abrupt end. One day, for no apparent reason, internet and technology stocks started to decline, and this precipitously continued for three years.

While the S&P 500® Index ultimately lost 40% of its value (and the NASDAQ over 70%), many investors lost everything. While many mutual funds had to shutter and assets were racing to exit indexes, First Eagle Global gained over 30% in return for their patient investors from 2000-2002. This same experience occurred for many managers who, out of diligence, refused to participate in the internet stock mania. However, market irrationalities can last so long that the trends of the day begin to be accepted as the new norm. The tide turns only when the trend has swept up the most investors.

When the tide inevitably turns, performance for capital markets becomes the “opposite day” (which usually lasts years). This is the reason why past performance is not indicative of future returns. A better statement is “change causes past performance to be an inverse predictor of returns.” Those managers, indexes, ETFs, or mutual funds with the best 1, 3, 5, 10-year performance (these time periods are linked by the same trend) can become the worst future performers. The more dramatic the past performance differences, the greater the reversal can be. Frontier experienced our best relative performance following the Tech Wreck of 2000, and it lasted for close to a decade.

Imbalances happen, sometimes for a long time, and they can sweep up even the most conscientious of investors.  Financial historians should not be surprised; the madness of crowds taking over the mind of the market has been a historical constant.

While many investors are likely bored and frustrated with this narrow but euphoric market environment, we are ready for the inevitable change. The following are the key attributes of Frontier’s positioning to take advantage of change:

1.Less risk

History clearly shows that long trends leading to narrow market leadership, and thematic manias do not end well.  Momentum matters in the short run, but it is valuations that matter in the long run. This is because change is inevitable, and at the point of change, investing in overvalued assets is often the worst place to be.


Data as of March 31, 2024. Source: Compustat, CRSP, Kenneth R. French. Goldman Sachs Research. Universe consists of US stocks with price, shares, and revenue data listed on the NYSE, AMEX, or NASDAQ exchanges. Series prior to 1985 estimated based on data from the Kenneth French data library, sourced from CRSP, reflecting the market cap distribution of NYSE stocks.

The second risk evident in the marketplace is interest rates that are higher for longer. While we haven’t touched on this, I don’t want this point to be missed. So far, all the prognostications of rate cuts and those extending duration have been wrong. Furthermore, a rising stock market and strong real estate market have continued to fuel a real wealth effect in the economy, which in turn can fuel demand-driven inflation. Commodity prices, which are usually a leading indicator of inflation, have risen 6% in 2024, which is clearly not a good sign for disinflation.


Source: YCharts, May 2024

If higher interest rates for longer is our new reality, this poses significant risks for the economy and asset prices – for both stocks and bonds.  All but one regime of higher interest rates for longer has resulted in falling asset prices, and a corresponding recession.


Data as of December 30, 2023. Source: Fred.

2.Greater diversification


Coincidental to extreme market concentration is the inevitable high expected returns of those assets that were left behind by the current trends and that are now near generationally low relative valuations. Value stocks, small-cap stocks, and emerging market stocks are obvious standouts of undervalued assets.

What is amazing to me is how similar this market environment is to that of the internet mania. They say that history doesn’t repeat, but it does rhyme. For those who were investors post the Tech Wreck, you may well remember the dramatic outperformance that occurred to undervalued assets, many of which were deemed un-investable at the time. We see similar valuation and expected return differences today. It is important to note that the differences in returns between assets post the tech wreck were upwards of 50%. Returns went from worst to first quickly, and the outperformance of these undervalued assets was not only highly positive while Tech stocks were being wrecked, but this outperformance also lasted decades. What appear to be slight differences in positioning could lead to dramatic outperformance.

Key takeaways

  • We believe that we are near the precipice of change and that this change could be quite abrupt for many investors.
  • Risk management is a priority in this market environment, and Frontier strategies are under-invested in risky assets.
  • At the same time, many assets have been left undervalued and under-owned due to the extended trend of U.S. technology stock leadership. Owning undervalued high-expected-return assets could prove advantageous for future outperformance.
  • Common sense would imply that at times like this, past performance is a contrary indicator of future returns.

If you are remotely concerned about risk, a reversal of trend, or future performance, then we are your firm.  When I speak with experienced advisors, most understand and are even pleased that we are one of the only firms that has stepped away from the herd and that are willing to act on behalf of their clients. The frustration is that this trend is lasting longer than investors can stand. Hence my opening statement. However, we are not reversing our positioning; we are stronger today in our resolve.  After all, we are a risk-first firm. Our boat is ready for a change in the weather, is your book?

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Past performance is no guarantee of future returns. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any type of securities, to invest in any particular asset class or strategy or as a promise of future performance, and no investment decision should be made based solely on the information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees, and expenses. Frontier may modify its process, opinions, and assumptions at any time without notice as data is analyzed.


Information provided herein reflects Frontier’s views and opinions as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third-party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information.


Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. The estimates, including expected returns and downside risk, throughout are calculated monthly by Frontier and will change from month to month depending upon factors, including market movements, over which Frontier has no control. They are only one factor among many considered in Frontier’s investment process and are provided solely to offer insight into Frontier’s current views on long-term future asset class returns. They are not intended as guarantees of future returns and should not be relied upon in making investment decisions.


Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from strategies managed by Frontier.


Frontier Asset Management, LLC is a Registered Investment Advisor. Frontier’s ADV Brochure and Form CRS are available at no charge by request at or 307.673.5675 and are available on our website They contain important disclosures and should be read carefully.

U.S. Large Cap Equity S&P 500 / Nasdaq Composite Index Represents US large company stocks.



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