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 Read more […]
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 Read more […]
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 Read more […]
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 Read more […]
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 Read more […]
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 Read more […]
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 Read more […]
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 Read more […]
Some active managers argue that the remedy for widespread active underperformance is more aggressive, more concentrated portfolios. If this is the correct prescription, it has a number of adverse side effects — for example, risk is likely to increase, and the relative importance of skill and luck in decision making is likely to shift in luck’s favor. A Read more […]
Is the remedy for active managers’ well-known performance difficulties to become more active? Some observers think so, and argue that less diversified, more concentrated portfolios should be the wave of active management’s future. But there are a number of adverse consequences to concentration — for example, risk is likely to increase. A second consequence is that in manager Read more […]