Overconcentration is one of 2023’s key themes amid an epic rally in the same handful of mega-cap US tech names that’ve dominated markets for years — plus two, in Nvidia and Tesla.
The situation became acute enough earlier this month to force a special rebalance for the Nasdaq 100.
Naturally, the announcement raised a few questions about the potential impact of the move, which’ll go into effect in a week. Spoiler alert: Any impact on individual stocks will be small and it’s probably in the price, markets being the “efficient” beasts that they are. And the adjustment won’t solve the problem faced by funds unable to best benchmarks due to concentration restrictions.
For those interested in the specifics, the collective weight of the “Magnificent 7” will fall to 44% from 56%, with Microsoft and Nvidia affected the most. Apple’s weight will fall, but it’ll be the largest constituent, as shown below in the table from Goldman.
Info Tech’s overall weight will fall only slightly, to 49% from 51%.
In a July 17 note, Goldman’s David Kostin wrote that “the rebalance will cause passive investment products tied to the NDX to algorithmically adjust their portfolios,” likely driving passive net selling “worth more than a day’s average trading volume in GOOGL and more than one-third of a day’s volume in MSFT, AMZN and NVDA.”
But, he went on, price action seen in and around the announcement of the rebalance “suggested investors were pre-trading some of these changes.”
The figure above give you a sense of how acute concentration had become by mid-July.
This year’s special rebalance “is unlikely to solve the challenge that elevated current market concentration poses for many benchmarked investors,” Kostin said, adding that “the outperformance of the largest stocks and their increased weights in benchmark indices have driven persistent mutual fund underweights in those stocks, which in turn have created large headwinds to funds’ relative returns.”
So far in 2023, less than a third of large-cap funds have managed to beat their benchmarks.
