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.
Gauging the alpha hurdle
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.