2020 witnessed outperformance from some of the largest S&P 500® companies as investors expected these firms to be better placed to navigate the COVID-19 environment. Exhibit 1 shows that this outperformance led to the largest names accounting for an unusually high proportion of the U.S. large-cap equity benchmark, and therefore having a bigger impact on…
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Growth style investing has outperformed value for over a decade but its relative returns against value so far in 2020 have been unprecedented: the S&P 500® Growth index boasts its highest-ever year-to-date relative returns (+32%) versus its value counterpart through the third quarter. This comes despite growth’s eight-month winning streak coming to an end in…
Readers of this morning’s Wall Street Journal learned (on the front page, no less) that many of the largest investors in the U.S. equity market hold similar portfolios. “The overlap in the top 50 stockholdings between mutual funds and hedge funds…now stands at near-record levels, a study by Bank of America Merrill Lynch found.” An…
At last Friday’s close, S&P Dow Jones assigned a number of technology and consumer discretionary names into a new “Communication Services” sector classification. Relative to the old Telecommunication Services definitions, the sector has grown from 3 to 22 companies (not counting dual share listings) and is less concentrated in absolute terms. However, Communications Services remains…
S&P Dow Jones Indices recently launched the S&P Japan 500 Equal Weight Index, an equal-weight version of the S&P Japan 500. Over the 15-year period ending in February 2018, encompassing the latter part of Japan’s so-called “lost decades” of stagnant equity returns, the equal-weight index would have outperformed the cap-weighted Japanese equity benchmark by a stonking…
It has not been a great start to the week for the technology sector, with large-cap tech stocks dragging down equity indices across the globe. With the current media focus on the industry behemoths, suitably arranged into fun acronyms (“FANGs” and so on), investors in the U.S. tech sector might be concerned about the risks…
Market observers have noted that the S&P 500’s performance so far this year has been dominated by a small number of technology stocks. This observation is certainly correct, although it’s fair to question the relevance of a statistic based on fewer than two months’ data. What’s more important is to bear in mind that this…
Assigning equal weights to each constituent, such as in the S&P 500 Equal Weight Index, historically would have offered material outperformance over capitalization-weighted benchmarks across a range of markets. Earlier this year, we published a paper examining how this occurred. There are several perspectives one can take, ranging from factor or sector exposures all the…
Should active managers shift away from well-diversified portfolios and concentrate only on “high conviction” holdings in hope of generating higher returns? We have suggested four consequences — higher risk, greater dominance of luck over skill, higher costs, and fewer outperforming funds — that are likely and logical outcomes of higher concentration. All four apply even for active…
Can active managers improve performance by moving from relatively diversified to relatively concentrated portfolios? Doing so is likely to increase risk, shift the relative importance of luck and skill, and raise trading costs. A fourth consequence is that the probability of active underperformance is likely to increase. A simple example provides some insight. Imagine a market with five…
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