There’s been no shortage of discussion lately about the extent to which the equity rally in the US hinges on the performance of a handful of stocks.
Indeed, it’s become something of a standing joke.
As we noted last week, the really funny part about it is that active mutual funds are outperforming benchmarks simply by overweighting the same stocks that are driving up those same benchmarks.
On a certain level that’s intuitive and you might say something like “well yeah, that makes sense,” but on another level it’s kind of absurd because it’s not clear whether that counts as “active” in any real sense, right?
I mean, you’re beating the benchmark by increasing your exposure to the stocks that are driving the benchmark.
The implication there is that if it weren’t for those overweights, the (already low) active share of the average growth and value fund would be even lower. As Goldman wrote in the note we excerpted in the above-linked post, “Consumer Discretionary and Info Tech account for almost half of the total active share for the average large-cap growth fund.” And the average large-cap growth fund’s active share is still plunging:
Well, one question you might reasonably ask given the above is this: “ok, well how unusual is this?”
That is, historically speaking, do a handful of stocks usually account for a large percentage of benchmark returns and if so, how does what we’re seeing now compare?
Barclays has some answers for you and in short, what you’re seeing isn’t normal and as such, has probably reached a limit. More below.
Reaching a limit on how far top performers can drive rally.
Ten mostly large-cap growth stocks have contributed 47% of the S&P’s 8% YTD returns. The average contribution of the top 10 stocks has been 30% in years that the S&P 500 has had a material positive return. At 17pp above the average since 2003, it would be unusual for this outsized 47% contribution to increase even further. We see an opportunity to reduce exposure to some of these large cap winners and selectively buy some of the “value” laggards.