- Director of Investment Strategy
- Funds
- Capabilities
- Insights
- Sustainability
- About Us
- My Account
Our Funds
Fund Documents
Asset class
Investment Solutions
Formats
Corporate Sustainability
Investment Solutions
Our approach to sustainability
The views expressed are those of the author 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.
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Small-cap value: Strong past, bright future?
While equity markets have had a challenging recent past, history teaches us that there may be several reasons to be optimistic about small-cap value.
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.
Navigating the new global economy in 2023
This executive summary distills the points of view of several of our 2023 Outlook authors. Discover the risks and opportunities they see as we enter a new economic and market regime.
China equity in 2023: Year of the stock picker
Despite the potential risks of investing in China equity, Equity Portfolio Manager Bo Meunier believes there are attractive opportunities for patient, discerning stock pickers.
China internet: Identifying opportunities amid stormy seas
Uncertainty in the Chinese internet company space has been elevated over the past few years. We believe that investors may benefit from tactical approach, rather than broad-based industry exposure.
What’s next for infrastructure?
Portfolio Manager Tom Levering and Global Industry Analyst Tim Casaletto explore the outlook for infrastructure assets in 2023 across each of the key areas.
2023 Equity Outlook
In our 2023 Equity Outlook, we offer a range of fundamental, factor, and sector insights as we look to 2023.
EM equity in 2023: Will the longest bear market in history continue?
We explore three key considerations for EM investors in today’s challenging environment and highlight potential winners and losers in 2023.
Equity investing with a thematic lens: Three game changers for 2023
Head of Investment Research Mary Pryshlak and Equity Portfolio Manager Tim Manning highlight their strongest convictions across global equity markets heading into 2023.
URL References
Related Insights