Composition of the determining portfolio by mid-2025

THE determining portfolio is built from stocks selected according to a "value" philosophy, following a "bottom-up" approach. This method consists of individually selecting each company based on value criteria, while giving limited importance to macroeconomic or sectoral factors. This makes it possible to identify undervalued companies whose potential is sometimes overlooked due to the surrounding market context. Consequently, the composition of the portfolio is essentially based on the characteristics specific to each selected stock, rather than the market as a whole.

The advantage of this approach is that it results in a portfolio that is significantly different from the leading stock indices. This is particularly useful in a context of overvalued markets. Currently, the S&P 500 is showing a CAPE Schiller Ratio of 37.7, which is the third all-time high after 2000 and 2021, two years that were followed by stock market corrections. It is even higher than 1929.

The determining portfolio, thanks to the value approach, thus displays valuation ratios much lower than the market:

• Price-Earnings Ratio average: 17.5 (vs. 27 for the S&P 500)
• Average Price-to-Cash Flow: 12.16 (vs. 19.1 for the S&P 500)
• Average yield (dividend yield): 1.9% (vs. 1.2% for the S&P 500)

Another example of this phenomenon is the sector allocation, which is very different between the portfolio and the S&P 500. The former is built based on the valuation of its constituents, while the market is heavily influenced by its large capitalizations.

Thus, technology is the most represented sector in the S&P 500 (33%), while this sector only represents 4% of the determining portfolio. However, technology is the most highly valued sector, with a Schiller ratio over 60. Conversely, financial services and healthcare are the most affordable currently (Schiller ratios of 21 and 26). These two sectors happen to be the most represented in the portfolio. Again, this is not the result of a deliberate choice based on a macroeconomic approach, but simply a reflection of the bargains that were found while rummaging through the bottom of the barrels.

Unsurprisingly, the portfolio also differs considerably when we look at the capitalization of its constituents. Two-thirds are represented by micro and small caps. If we add mid-caps, we arrive at more than 80%. Conversely, the S&P is almost entirely made up of large and mega caps.

With this approach, the determining portfolio is composed of securities that are less expensive and less in the spotlight than those currently found in stock indices. Moreover, it displays a low correlation with the stock market (0.3), helped in this sense, it is true, by other contrarian assets and strategies. This is a good point given the current overheating, even if currently it is growth stocks that are being pulled up, to the detriment of value stocks.