- Co-Head of Investment Strategy
- About Us
- My Account
The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Anyone allocating active capital or doing manager research in the US or global space may be getting a little weary of hearing about the impact of megacap stocks like Google, Apple, Facebook, Amazon, and Microsoft (GAFAM).1 However, given our Fundamental Factor team’s work on manager research and multi-manager portfolios, we know that asset owners are very aware that as the weight of megacap stocks in US and global benchmarks increases, the risk arising from active managers being underweight companies like these increases as well.
These underweights are often a fallout rather than a deliberate view, as active managers tend to allocate away from the largest names in the benchmark to source capital for high-conviction ideas. For this to work, those high-conviction names need to outperform the largest benchmark holdings, creating an alpha hurdle. Over the past decade, that alpha hurdle has increased dramatically. To illustrate this point, Figure 1 shows the annual impact over the last 20 years of not owning the GAFAM stocks for a manager benchmarked to the S&P 500. Notably, the last time being underweight “helped” active managers was in 2008.
We’ve found that active managers often have a high bar to own megacap stocks given the capital needed and the active share give-up. And if active managers do try to manage risk from index concentration, they run the risk of looking too similar to the benchmark. This means an asset owner’s active-risk or active-share objectives can conflict with prudent risk management. Additionally, as megacap names have driven recent benchmark performance, an asset owner’s desired short-term alpha behavior may conflict with longer-term alpha objectives.
As we see it, there are a variety of ways active managers may address this risk:
Ultimately, when managing the risk from market narrowness, we believe it is important for managers to connect risk management with their philosophy and process and to have a robust understanding of the asset owner’s expectations.
1Securities are included for illustrative purposes only and are not intended to be an investment recommendation or a reflection of any particular Wellington holding.
Shareholder activism in Japan: Integrating ESG within the investment processContinue reading
Monthly Market Snapshot — August 2023Continue reading
How a thematic approach can help harness change within portfoliosContinue reading
Thematic investing focus: Cloud-backed AI and enterprise intelligenceContinue reading
Activism – History and evolution in JapanContinue reading
Adding thematic equity investments to a multi-asset portfolio: An allocator’s handbookContinue reading
Thematic investing focus: The transportation revolution has arrivedContinue reading
Shareholder activism in Japan: Integrating ESG within the investment process
In the final article within our series on shareholder activism in Japan, ESG Analyst Soo Ho Jung shares how the Japan equity team integrates ESG to help realize value for investors.
Monthly Market Snapshot — August 2023
A monthly update on equity, fixed income, currency, and commodity markets.
More from the core: How fundamental extension (140/40) strategies could help
Extension strategies may offer investors more flexibility in portfolio construction, along with potential to achieve greater risk-adjusted returns, thus delivering “more from core” in equity allocations without taking on significantly more tracking risk.
How a thematic approach can help harness change within portfolios
Multi-Asset Strategist Supriya Menon and Investment Director Andrew Sharp-Paul discuss why a thematic approach can help harness change within portfolios against a structurally different macroeconomic backdrop.
Thematic investing focus: Cloud-backed AI and enterprise intelligence
Cloud-based computing and artificial intelligence are transforming the way enterprises operate, creating what we believe will be a secular tailwind for companies providing software, machine learning tools, and cybersecurity.
Activism – History and evolution in Japan
Investment Specialist Toshiki Izumi examines the history of shareholder activism in Japan, with particular emphasis on the differences between current and historical attitudes toward activism.
Adding thematic equity investments to a multi-asset portfolio: An allocator’s handbook
Thematic investing may add a powerful return engine to portfolios, but allocators sometimes struggle with implementation decisions. Members of our Investment Strategy Team offer a framework for thinking about allocation size, strategy selection, and performance evaluation.
Thematic investing focus: The future of food
The global food system has reached a tipping point and change is coming, creating investment opportunities aided by demographic, policy, and innovation tailwinds.
Pivoting from innovation and growth to stability and value
In a more volatile world, stability may take priority over innovation, and that, explains Multi-Asset Strategist Adam Berger, would tend to favor value stocks over growth stocks.
Thematic investing focus: The transportation revolution has arrived
New technology and environmental concerns are creating a disruptive force in the transportation sector, leading to supply-chain investments and a host of new addressable markets.