Your Portfolio Is One Big AI Bet — The Diversification Illusion

Rupert Mitchell (0:00)

Most pockets of the US equity markets feel very expensive for me. What if all of these AI economics don't math out? The lazy index exposure has never been more focused on a single bet than it has done right now. I think there's much more value outside of US equities right now.

Maggie Lake (0:23)

Hi Rupert, welcome to Wealthion.

Rupert Mitchell (0:25)

Hi Maggie, how are you?

Maggie Lake (0:27)

I'm doing well. I'm happy to catch up with you. You're usually in Australia, but the time change is in our favor because you're in the UK right now.

So I'm really interested to get your thoughts on these markets.

Rupert Mitchell (0:39)

The lazy index exposure has never been more focused on a single bet than it has done right now, right? You know, let's say you think you've diversified and you've got a 80% allocation to the MSCI global acquie. Right?

And maybe a few bonds, right?

You know, you're making one big bet on this AI outcome right now. You know, even if you think I've got a sleeve in emerging markets, the MSCI emerging markets is 50% of bets on semiconductors right now. Once you take into account, you know, Samsung, Electronic, SK, Hynex and TSMC plus a bunch of others. You know, that is not your mother's emerging market portfolio.

Maggie Lake (1:32)

You are trying to build a portfolio to withstand the next 20 years, which I think really speaks to our audience who are so concerned about so much of what's going on. We're going to talk a little bit about your process. But first, give me your sense of what's happening in markets. What do you make of the action we've seen, particularly when it comes to global bonds? They seem to be sending off some signals.

Rupert Mitchell (1:54)

Listen, I'll be very honest. I'm not a great lover of OECD fixed income as an asset class and haven't been for, gosh, more than five years right now. In fact, in terms of construction of my own portfolios, I've really been sort of seeking out bond replacements over the years. And we can talk about ways in which I've done that, you know, in a second, if you like. But in the last couple of weeks, for the first time in God knows how long I can remember, I have started to add some exposure in shorter duration treasuries. So two year notes specifically.

My personal view is that I don't think, notwithstanding sort of the narrative and the way that short term interest rate futures markets are pricing the next year or so, I don't think Kevin Warsh has as many hikes in his armory as the short term interest rate markets expect. I think there's so many parts of the economy that can't support higher front end rates. And I think they'll make themselves heard quite soon. Yes, we've got this strong nominal GDP narrative, largely thanks to the phenomenal spending spree that hyperscalers and others have been on with AI data centers. But even they fund a lot of this capex at the front of the curve. And, you know, I think that the runway is pretty narrow. And we just saw today that another Arch Dove has been appointed as advisor to Scott Besant. It's just been announced that David Zervos, the Jeffreys strategist, has been appointed as an advisor to Scott Besant. So he's leaving Jeffreys to do that.

You know, I think that there is an overly hawkish outlook to the bond market right now.

Maggie Lake (4:11)

Are we sort of underestimating the government's role in all of this? I mean, if the government, the US government ultimately wants bond yields down, is that what they're going to get?

Rupert Mitchell (4:21)

Listen, I think that ultimately bond yields will come down. It's just what does the landscape look like within that outcome, right?

You know, do bond yields come down because there's an accident in the economy, right? Do bond yields come down through some form of financial repression exercise? What does that look like? Where does gold go there? You know, it's, I don't think you can answer that question without answering a bunch of others.

Maggie Lake (4:59)

So I think that's so smart because we tend to focus on price, right? Will yields go down? Will stocks go up? The why and how they're getting there matters just as much, because that's going to tell you a lot about portfolio, in particular, the kind of role that real assets and kind of purchasing power needs to play. And that's something we talk about a lot here on the channel.

Rupert Mitchell (5:25)

So it's interesting. I mean, I've just come back from a wonderful weekend, hanging out with some great macro thinkers around the world. And I know a lot of them.