Hyper-concentration on market cap-weighted indices: challenging active portfolio managers

Published on October, 30th 2020 Market and research
Winter in... Coming?
Flageollet

Alexis FLAGEOLLET

Financial Engineer

[Invest. Pro.] Intended for Professional Clients in accordance with MIFID.

Written by Alexis Flageollet, Financial Engineer, and Juan Sebastian Caicedo, Portfolio Manager at Seeyond, on October, 12th 2020

  

In this paper, we will demonstrate that the level of concentration on the MSCI USA index reduces the possibility of generating outperformance, causing a scarcity of diversification and stock-picking possibilities. MSCI USA Mega caps have largely been favored in 2020 - more so than in 1999, at the peak of the dotcom bubble (according to our metrics). We herein focus on the US equity market for three main reasons: (i) the severity of the concentration phenomenon there, (ii) the weight of the US inside the global market, and (iii) to remain concise (this phenomenon of concentration is also present across Asian markets).

 

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This article has been provided for information purposes only to professional clients as defined in the MiFID Directive. It must not be used for retail investors. The provision of this material or reference to specific sectors or markets in his article does not constitute investment advice or a recommendation or an offer to buy or sell any security. Investors should consider the investment objectives, risks, and expenses of any investment carefully before investing. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article.